For this proposal, I decided to look further into the specifics as to why overpaying CEOs is considered unethical. After searching the database JSTOR, I came across a case study by Mel Perel called “An Ethical Perspective on CEO Compensation”. The study starts by saying that although hiring the best CEO that money can buy seems like the best idea, evidence shows that CEOs can in fact be overpaid. He also goes on to say that “much of the ethical misconduct in business during the latter half of the 1990s can be blamed on excessive incentive packages offered to CEOs” (Perel 381). This introduction hooked me into the case and got me interested as to the evidence surrounding these bold statements.
One of his main arguments, as we talked about in class has to do with the ideas of shareholder vs. stakeholder. He thinks that most CEOs take the shareholder approach because they are compensated with bonuses and kept in power by the board when stock prices are high. The research that he found showed that a large portion of CEO compensation was unrelated to company performance, contrary to popular belief. He also is critical of using stock price as a performance metric because in reality CEOs “resorted to highly questionable or outright illegal tactics to artificially boost stock prices” (Perel 383). He also believes that the board of directors are often to blame for this excessive compensation because they become so caught up in hiring celebrity CEOs with media reputations that they are willing to pay for the publicity and attention that these celebrities can get for the company.
The study also goes into the influence of stock options and how CEOs were able to get away with what they did in the 1990s. He argues that boards and CEOs should take responsibility if their company is performing poorly so that they make changes to improve it. Lowering their pay if they are performing poorly could be a good first step. The case then goes into the Enron case that we discussed in class which will be another great resource for my paper. He finishes by proposing recommendations for the situation at hand. He says that he agrees with the actions that the NYSE and NASDAQ have recently proposed, but does not think that these are enough to challenge these powerful CEOs. He thinks that there needs to be some standard system of metrics that should be used to measure executive pay across the board, rather than just the decisions of board members who often are not very informed. He talks about DuPont and how their board of directors looks to the SVP’s compensation to determine the CEOs compensation because they are more likely to pay them in relation to performance and not overpay them. This case offers great ideas for how to change the system in place and will be good to use as inspiration in my white paper.