Introduction
Business ethics can be described as the application of the moral rules that exist within a society to the practice of business. The fact that morals are highly dependent on the cultural or religious background of a person as well as his or her personal interpretation conditions the difficulty of ethics definition. As a result, just like morals as such, business ethics is a highly controversial notion. Most often, following ethical guidelines results in losing opportunities and increasing the costs of running a business. Still, the proofs of ethical business conduct are highly valued by the customers and improve a company’s reputation, and a blatant lack of respect towards morals results in public outcries.1
Executive payment is among the many ethically controversial issues in the field of business ethics. Being in the position of power, managers have the chances of using it for their own advantage, which inevitably causes displeasure of other employees and, in exceptional cases, of public at large. At the same time, it appears logical that the managers who bear immense responsibility are compensated for their merits, achievements and troubles. The boundary between just and excessive compensation is vague, and this paper contains an attempt at demonstrating the roots of the problem as well as its possible solutions.
Controversy Background
Executive compensation as such is neither illegal nor unethical: essentially, it includes the basic salary of a manager along with the bonuses (for example, annual ones that are allocated for the achievement of goals), various compensations (for example, change-in-control agreement that is meant to protect the manager in case of takeover and presupposes a certain amount of monetary compensation), and perquisites or perks (for example, gasoline credit cards or personal use of corporate transport).2 The aim of executive compensation, clearly, consists in providing the manager with incentives, motivating him or her to maintain good performance, and decreasing the chance that he or she leaves the company. A particularly capable and valuable manager will be paid well-deserved prominence, and it is difficult to blame the company for singling him or her out.3
However, the notion of executive compensation is often concerned with excessive compensation that has been widely criticized. Excessive compensations may involve violation of the law or the rules of ethical conduct but, in either case, they cause displeasure of other employees as well as, in exceptional cases, the public.4 That is exactly why it is not the managers’ salary that matters in the connection to executive compensation abuse, but its relative size to the average wage in the company.5 Apart from that, it should be pointed out that abnormally high executive compensation indicates other troubles existing in the company including the lack of proper monitoring, control, and governance mechanisms. Also, the qualities of the manager who agrees to excessive compensation could include dishonesty and incompetence.6 The latter fact is probably the reason for public disapproval of excessive compensation.
A recent scandal of the kind involved Peskov, the spokesman for the Russian President Vladimir Putin. His expensive, exclusive watch that cost more than a four years’ worth of his official salary has attracted the public eye. Later, Peskov claimed that the watch was the present of his wife, Tatyana Navka, a famous Russian ice dancer. At the same time, his friends claimed that he borrowed the watch to tease the public just for a joke. It is not surprising that the discrepancy of explanations caused suspicions. The discrepancy in the official income and the actual cost of the watch allows one to suspect that illegal actions were involved as well. It fact, it would not be an overestimation to say that similar scandals seem to be happening rather often. For example, a rather compromising situation involved Russian Patriarch Kirill. The gold Breguet watch that he was wearing during a press meeting was later edited out of the footage, which indicates that the church official expected a negative reaction to his religiously and ethically inappropriate demonstration of wealth.7
As it is evident from the examples, abuse of power and excessive compensation, while clearly unethical and occasionally illegal, is being practiced not only by profit companies’ managers. Here, it should be pointed out that, unless the actions that lead to excessive compensation can be described as illegal, the design of the rules concerning executive compensation is dependent on the company’s policies. The illegal actions could include fraud or counterfeisance of papers or signatures, but excessive compensation is not always illegal, and the fact that law is not applicable to most cases increases the possibility of excessive compensation. Therefore, proposals concerning the reduction of ethical misconduct possibility are mostly aimed not at the law but at the corporate codes of ethics and relevant committees.8 While the suggestions concerning the restrictions of legal regulations do appear, it seems obvious that the law is not really suitable for ethical controversies.
Analysis
The core of the problem appears to lie in the fact that business ethics (as well as ethics in general) can be interpreted in numerous ways that are too difficult to systematize. Certain aspects of ethics can depend on cultural or religious differences, for example, the gender-based discrimination in many Muslim countries.9 At the same time, the personal qualities of a CEO also play an important part: for instance, traits like narcissism or humility may warp a CEO’s perception of his or her merits and achievements.10 Unless the violation of the law is involved, the guidelines of executive compensation are very vague. Given this fact, it is apparent that no decisively correct solution o the problem exists, and a balance between ethical, reasonable, and profitable should be found.
It is definitely ethical to encourage a person’s hard work, and the limit can be defined only by the executive compensation committee. It is logical to suggest, however, that this limit depends on numerous aspects including the company’s possibilities and the manager’s personal qualities. At the same time, committees are expected to control the managers who have excessive possibilities of abusing executive compensation. The phenomena that could be called control mechanisms for the committee’s decisions include the law, corporate codes of ethics and personal interpretations of ethical principles.
From the clamorous scandals, a couple of which have been demonstrated above, it could appear that neither of the mechanisms is totally effective. While it is apparent that the people involved in the scandals realize that their actions are unethical and illegal, neither the fear of the law nor the conscience appear to stop them. The relevant committees of their organizations also seem to be ineffective. At the same time, it should be pointed out that the exceptional cases of power abuse like the ones mentioned cause significant public outrage that may be regarded as another mechanism of control. Obviously, the amount of pressure that the public can put on those in power varies among states, but as democratic principles spread across the globe, this mechanism could acquire a greater value.
Conclusion
Executive compensation can be described as an extremely controversial issue, which means that there is no correct solution to all the difficulties caused by it. The main problem in this respect is finding the equilibrium between a decent payment for the managers and the vague rules of ethics that govern the community. In this respect, we are not mentioning the illegal actions connected to executive compensation, as this part of the problem does have direct and clear guidelines expressed in law. The real controversy of executive compensation lies in the field where the law has no power. In this case, the people who have to take decisions concerning executive compensation are left without proper guidance.
As it has been mentioned, in this case much depends on the company’s code of ethics and the executive compensation committee. These people are given the authority to take decisions that are expected to be just and consistent with the law. Apart from that, the person in the position of power must also have a say in the matter. His or her personal interpretation of ethics may influence the decision concerning executive compensation.
Ethical dilemmas require ethical decisions. As a result, the control mechanisms of executive compensation are as vague and uncertain as the problem itself. Still, they exist and function, and maintaining them appears to be vital for the control of executive compensation problem.
Endnotes
1 Eyüp Aygün Tayşir & Yener Pazarcık, Business Ethics, Social Responsibility and Corporate Governance, 99 Procedia – Soc. and Behav. Sci. 294, 296-301 (2013).
2 William J. Heisler, Ethical choices in the design and administration of executive compensation programs, 50 Bus. Horizons 277, 278-80 (2007).
3 Ashley N. Newton, Executive compensation, organizational performance, and governance quality in the absence of owners, 30 J. Corp. Fin.195, 216 (2015).
4 Heisler, supra note 2, at 278.
5 Newton, supra note 3, at 196.
6 Id. at 216.
7 Andrew Roth, How could Vladimir Putin’s spokesman afford a $620,000 watch? Wash. Web.
8 Heisler, supra note 2, at 285-289.
9 Stephen Bryan et al., The effect of cultural distance on contracting decisions: The case of executive compensation, 33 J. Corp. Fin.180, 193 (2015).
10 Charles A. O’Reilly et al., Narcissistic CEOs and executive compensation, 25 Leadership Q. 218, 226 (2014).