1. CEO Packages
Is executive
compensation too
Emma Kitchen, Laura Jibson
George Rispin, Xue Junzhao
high?

2. Introduction: Aims
 Illustrate historical and current levels of CEO
compensation
 Assess views of justice in wages
 Examine arguments for and against high levels of
compensation
 Recommendations
2

3. During the time period of 1991-2001,
CEO compensation increased by 340%
The average workers
compensation only
increased by 36%

4. Background
 CEO’S pay has increased significantly following the
enactment of anti takeover laws passed in 1980’s.
 This resulted in CEO’S receiving a large proportion of
their compensation in the form of stocks and shares
 There is an increased sensitivity to performance and the
amount they received was dictated by the market and
industry factors.
 This is especially relevant now as the cheap stocks which
CEO’S received during the stock market decline are
starting to rise, resulting in huge pay-outs
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5. Two Decades of CEO Pay
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6. Justice in Wages
 According to Moriarty (2009) there are three common views
frequently applied to justice in wages:
– The Agreement View
 “Appropriate prices for goods are obtained through arms length negotiations
between informed buyers and informed sellers”
– The Desert View
 “People deserve certain wages for performing certain jobs, whatever they might
agree to accept for performing them”
– The Utility View
 “To maximise a firms wealth by attracting, retaining and motivating talented
workers”
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7. The Agreement View
 CEO compensation is decided by the
‘Compensation Committee’
 This is made up of directors who serve on the
company's board
 Directors are elected by shareholders
 Members should be informed and independent
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8. The Desert View
 Compensation should be based on contribution
and performance
 Which other factors should be taken into
consideration?
 How can CEO contribution be measured?
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9. Example: Fred Goodwin
 Fred Goodwin is the former chief executive for RBS, of which
70% is now owned by the taxpayer.
 The guardian newspaper referred to him as “The worlds
worst banker” due to his irresponsible dealings in the sub
prime mortgage market.
 He received an very large payoff after he agreed to resign
 His pension is £16.9 million, this works out at an average of
£693,000 per year

10. Cont.
 His payoff is in line with fellow bankers who receive an
average of £650,000 per year
 The high pension caused anger with taxpayers and MP’S
 Bank of England governor criticised Goodwin's large
pension, saying that it encourages reckless gambling and
rewarding bad behaviour

11. Example: Black and Decker
 New USA legislation passed in 2010 resulted in public
companies having to let shareholders vote at least once
every three years regarding CEO compensation
 In 2011 only 12 companies voted against CEO pay, this is
due to industry pressure to “pay the going rate”
 The board voted against Black and Decker’s CEO John
Lundgren receiving $32.6 million
 But the board eventually gave in to pressure and paid
Lundgren, making him the fifth highest paid CEO in 2010

12. Cont.
 Theory of Managerial Power supports this. As Lundgren
was very powerful he could demand the package
 Due to public anger, the board tried to disguise the
amount he received by issuing him 325,000 shares valued
at $18.7 million
 With the average employee earning $40,000, this
resulted in a pay gap of 325-1

13. Example: John Lewis Group
 69,000 employees as ‘Partners’, essentially
owning a share of the profits
 Bonus structure is the same for every worker at
every level, a common % of income based on the
group’s annual profit
 2009 Operating Profit £316.8m, Partners’ Bonus = 13% of
salary, total £125.4m
 2010 OP £389.7m, Bonus = 15% of salary, total £151.3m
 2011 OP £431.0m, Bonus = 18% of salary, total £194.5m
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14. Arguments For and Against

15. Arguments For
 Economic Analysis
 Correlation between CEO pay and company performance
 Will provide an incentive for innovation and risk-taking
 Attract, retain and motivate talented leaders

16. Arguments Against
 The relation between executive and average employee’s
compensation
 Widening gap between executive and average
employee’s compensation
 Gap between domestic and foreign executive
compensation
 Compensation equity vs. work equity
 Distributive equity

17. Recommendations
 Base CEO compensation on improving real
measures, such as; earnings per share, return on
invested capital and market share
 Ban executives from selling shares for a fixed
number of years
 Specify the dates on which equity awards will be
given
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18. Cont.
 Payoff shares based on an average stock price,
rather than a single stock price
 Introduce a measure whereby executives must
release a statement detailing how and when they
will sell any shares
 Salary caps
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19. References
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Oxford Handbook of Business Ethics (pp. 161-201). New York: Oxford University Press.
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Substitutes? Contemporary Accounting Research, 26(3), 701-728.
 Crane, A., & Matten, D. (2004). Business Ethics. Oxford: Oxford University Press.
 DeGeorge, R. T. (2010). Business Ethics. New Jersey: Pearson Education.
 DesJardins, J. (2009). An Introduction to Business Ethics. New York: McGraw-Hill.
 Henderson, B. C., Masli, A., Richardson, V. J., & Sanchez, J. M. (2010). Layoffs and CEO Compensation: Does CEO
Power Influence the Relationship? Journal of Accounting, Auditing and Finance, 25(4), 709-748.
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Business Ethics (pp. 102-112). Belmont: Wadsworth, Cengage Learning.
 Meredith, D. R. (1992, September). Exploding Myths of CEO Pay. (79), pp. 32-44.
 Moriarty, J. (2009). Do CEO's get paid too much? In T. L. Beauchamp, N. E. Bowie, & D. G. Arnold, Ethical Theory and
Business (pp. 692-702). New Jersey: Pearson Education.
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 Rawls, J. (2998). Distributive Justice. In T. Donaldson, & P. H. Werhane, Ethical Issues in Business: A Philosophical
Approach (pp. 222-232). New Jersey: Pearson Education.