Executive Pay and Economic Crisis Essay

Executive Pay and Economic Crisis

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Executive Pay and Economic Crisis

Read the Executive Pay and Economic Crisis case. Using ethical theories and principles learned in this course, especially the common good, analyze the moral worth of the decisions made in this case. Also discuss the various options open to people in the case and choose the ones you think would have been the best. Justify the choice you make using resources from this course. 300 words.

Resources from cource:

https://youtu.be/rZ8hg9MlVf8

https://plato.stanford.edu/entries/communitarianism/

Executive Pay and Economic Crisis

For several years following the spring of 2008, U.S. banking and finance experienced its deepest crisis since the Great Depression of the 1930s. In the first few months of that catastrophic crash, the largest financial institutions, which had defrauded investors out of billions of dollars, were kept afloat by taxpayers, who funded an $800-billion slush fund that loaned enormous sums to insolvent insurance companies and teetering banks. Meanwhile, executives and administrative employees of these financial institutions were taking home disproportionate shares of the profits, even after the market had gone bad and these institutions were at risk of failing.

Bear Stearns, for instance, paid out $11.4 billion in compensation and employee benefits in the three years leading up to the crisis, while its shareholders only received on the order of $1.4 billion in J. P. Morgan Chase stock when the company was sold. The executives of Lehman Brothers received $21.6 billion in the same three-year period, and their shareholders were left with nothing when the company went bankrupt. During this same period, Merrill Lynch paid executives more than $45 billion, while its shareholders had to settle for stock in Bank of America that was worth less than a fifth of the original offer value. In 2007 alone, Citigroup paid out $34.4 billion in compensation and yet a few years later the company was valued at about half this figure. The most egregious case of all was the insurance giant AIG, which paid executives $165 million in bonuses in March 2009 as part of a larger $450 million package, in spite of the fact that the company had lost $61.7 billion in 2008 and had been bailed out by taxpayers to the tune of $170 billion. Meanwhile, the pay of the average worker in the United States remained stagnant and the minimum wage eroded.

Long before the economic crash in 2008–09, executive pay was outsized in the United States, both in comparison to historical standards and to the norm in other contemporary capitalist countries. In 1980, the average CEO of a Fortune 500 company in the United States made 42 times the income of the average worker, which was in proportion to the ratio going back many decades to World War II. By the end of the 1980s, though, that ratio had jumped to 85 times, and by the year 2000, it had ballooned to 525 times. An examination of data across cultures reveals a similar disparity. For instance, in Canada the contemporary ratio of executive compensation to average worker pay is 20 to 1, and in Japan, it is 11 to 1. Overall, CEOs in the United States make three times as much as their peers in other countries around the world.

Many theories purport to explain these disparities in CEO compensation. One such explanation, the marginal revenue-production theory, claims CEOs in a competitive labor market who produce increased revenue for a company ought to be compensated according to the increased value they brought to the enterprise. If they do not receive compensation in line with their value, other companies will recognize the opportunity and offer these leaders a more lucrative deal. All of the companies referenced lost enormous revenue during the same period in which executive pay increased logarithmically. According to the theory of marginal revenue production, then, executive pay should have plummeted along with the bottom line. However, in reality, executive pay seems to defy all laws of gravity.

Another theory used to explain the unusual and suspicious pay disparities in American corporations is known as tournament theory. This theory conceives of the various national CEO labor markets as different levels of a single-elimination tournament. The smaller global markets are likened to bush-league tournaments in which prizes are less lucrative because the competitors have less talent and the stakes are correspondingly lower. The American CEO labor market, by comparison, is the most elite and competitive tournament in the global capitalist arena and attracts the most select talent. Therefore, along with the highest stakes come the highest compensation and the most lucrative returns.

Once again, there is little direct correlation between the theory and the actual practice of CEO compensation. If the tournament theory accurately described real practice, then CEO compensation in the various national economies would at least roughly correspond to the size and influence of that economy within the larger global marketplace. While American CEOs are the highest paid by far and the US economy is the largest on the planet, compensation in the second-largest economy, Japan, remains relatively low. In fact, CEO pay scales in places other than the United States do not seem to correlate to the relative size and influence of the national economy.

Other theories that try to explain and justify the unprecedented expansion in CEO pay in market terms, such as the opportunity-cost theory, suffer a similar fate. From the perspective of neoclassical market theory, increased access to financial markets in the United States has driven down the barriers to entry in many industries, which has, in turn, increased competition for talent. This increased competition for executive talent is often cited as the key catalyst for executive talent is often cited as the key catalyst for the current disparity in executive pay. However, this factor, when taken alone and compared historically and across national boundaries, does not seem to determine executive pay in any consistent pattern that would suggest this is somehow a causative factor.

While neoclassical capitalist economic theorists have attempted to validate the expansion of executive compensation, others have sought explanations outside the realms of market theories. Many have pointed out that executives from one company normally sit on the board of directors of other companies, which results in a closed system of country-club pals making decisions about each other’s compensation. It seems unsurprising, then, that this small, elite group of individuals struggles to be critical, demanding, and modest in its remunerative policies when it comes time to evaluate the performance and salaries of the CEO. In these kinds of closed social systems a sort of mutual-admiration society develops that logically feeds the expansion of executive pay in a way that becomes difficult to track and nearly impossible to hold accountable to stakeholders, especially when those stakeholders regularly hear about the necessity of ever- increasing executive pay scales due to the always-escalating competition for talented leaders.

Many have complained that enormous executive bonuses and pay packages are tantamount to stealing from stockholders and other employees of a company. The argument suggests that American companies actually have become less competitive in relation to their global peers due to the wasteful squandering of capital resources on individuals whose contribution does not match the value of their compensation. All of these issues raise questions about whether these compensation practices serve the common good.

Questions

1. How does the expansion of executive pay in deteriorating economic times affect the common good?
2. What principles does the common good offer that might suggest a different approach to executive compensation?
3. How would executive compensation be administered if it were ordered toward achieving the common good?
4. If you owned a Fortune 500 company, what would be the most important qualifications for your executive positions? What qualities would you look for in job candidates for CEO?

RUBRIC
Excellent Quality 95-100%	Introduction 45-41 points The background and significance of the problem and a clear statement of the research purpose is provided. The search history is mentioned.		Literature Support 91-84  points The background and significance of the problem and a clear statement of the research purpose is provided. The search history is mentioned.			Methodology 58-53 points Content is well-organized with headings for each slide and bulleted lists to group related material as needed. Use of font, color, graphics, effects, etc. to enhance readability and presentation content is excellent. Length requirements of 10 slides/pages or less is met.
Average Score 50-85%	40-38 points More depth/detail for the background and significance is needed, or the research detail is not clear. No search history information is provided.		83-76  points Review of relevant theoretical literature is evident, but there is little integration of studies into concepts related to problem. Review is partially focused and organized. Supporting and opposing research are included. Summary of information presented is included. Conclusion may not contain a biblical integration.			52-49  points Content is somewhat organized, but no structure is apparent. The use of font, color, graphics, effects, etc. is occasionally detracting to the presentation content. Length requirements may not be met.
Poor Quality 0-45%	37-1 points The background and/or significance are missing. No search history information is provided.		75-1 points Review of relevant theoretical literature is evident, but there is no integration of studies into concepts related to problem. Review is partially focused and organized. Supporting and opposing research are not included in the summary of information presented. Conclusion does not contain a biblical integration.			48-1 points There is no clear or logical organizational structure. No logical sequence is apparent. The use of font, color, graphics, effects etc. is often detracting to the presentation content. Length requirements may not be met
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