Executive Compensation and Employee Remuneration: The Flexible Principles of Justice in Pay

Original Paper
  • 30 Downloads

Abstract

This paper investigates a series of normative principles that are used to justify different aspects of executive compensation within business firms, as well as the remuneration of lower-ranking employees. We look at how businesses perform pay benchmarking; employees’ engagement, fidelity and loyalty (and their effects on pay practices); and the acceptability of what we call both-ends-dipping, that is, receiving both ex ante and ex post benefits for the same work. We make two observations. First, either different or incoherent principles are used to justify the pay of executives compared to employees, or the same principles are applied differently. Second, these differences or inconsistencies tend to be to the benefit of executives and/or to the detriment of employees. We conclude by asking whether there is any reason for thinking differently about executive pay than we do about employee pay. Our analysis leads us to question the principles justifying current executive compensation and to wonder if these principles are potentially being instrumentalized to serve other ends.

Keywords

Pay justice Executive compensation Employee remuneration 

Notes

Acknowledgements

The authors would like to acknowledge financial support from the Stephen A. Jarislowsky Chair in Corporate Governance, the Institute for the Governance of Private and Public Organizations, and the Mitacs Accelerate program.

Compliance with Ethical Standards

Ethical Approval

This article does not contain any studies with human participants or animals performed by any of the authors.

References

  1. Albrecht, S. L. (2011). Handbook of employee engagement: Perspectives, issues, research and practice. Human Resource Management International Digest, 19(7), 3–19.Google Scholar
  2. Albuquerque, A. M., De Franco, G., & Verdi, R. S. (2013). Peer choice in CEO compensation. Journal of Financial Economics, 108(1), 160–181.CrossRefGoogle Scholar
  3. Alchian, A. A., & Demsetz, H. (1972). Production, information costs, and economic organization. The American Economic Review, 62(5), 777–795.Google Scholar
  4. Allaire, Y. (2012). Pay for value: Cutting the Gordian knot of executive compensation. Montréal, QC: Institute for the Governance of Private and Public Firms.Google Scholar
  5. Allaire, Y., & Dauphin, F. (2015). How Pershing square found success at Canadian Pacific Railway. Financial Post, Toronto, ON. Retrieved from http://business.financialpost.com/fp-comment/how-pershing-square-found-success-at-canadian-pacific-railway.
  6. Anderson, J. (2008). Stock exchange’s ex-chief wins battle to keep pay. The New York Times, New York, NY. Retrieved from http://www.nytimes.com/2008/07/02/business/02grasso.html.
  7. Anderson, S., & Klinger, S. (2016). A tale of two retirements: As working families face rising retirement insecurity. CEOs enjoy platinum pensions, Institute for Policy Studies, Washington, DC. Retrieved from http://www.ips-dc.org/report-tale-two-retirements.
  8. Atkins, E. (2017). Hunter Harrison joins CSX Corp. as CEO. The Globe and Mail, Toronto, ON.Google Scholar
  9. Atkinson, A. B. (2015). Inequality: What can be done?. Cambridge, MA: Harvard University Press.CrossRefGoogle Scholar
  10. Bal, P. M., Kooij, D. T. A. M., & De Jong, S. B. (2013). How do developmental and accommodative HRM enhance employee engagement and commitment? The role of psychological contract and SOC strategies. Journal of Management Studies, 50(4), 545–572.CrossRefGoogle Scholar
  11. Barrick, M. R., Thurgood, G. R., Smith, T. A., & Courtright, S. H. (2015). Collective organizational engagement: Linking motivational antecedents, strategic implementation, and firm performance. Academy of Management Journal, 58(1), 111–135.CrossRefGoogle Scholar
  12. Bebchuk, L. A., Cremers, K. J. M., & Peyer, U. C. (2011). The CEO pay slice. Journal of Financial Economics, 102(1), 199–221.CrossRefGoogle Scholar
  13. Bebchuk, L. A., & Fried, J. (2006). Pay without performance: The unfulfilled promise of executive compensation (1st ed.). Cambridge, MA: Harvard University Press.Google Scholar
  14. Bebchuk, L. A., & Grinstein, Y. (2005). The growth of executive pay. Oxford Review of Economic Policy, 21(2), 283–303.CrossRefGoogle Scholar
  15. Bizjak, J. M., Lemmon, M. L., & Naveen, L. (2008). Does the use of peer groups contribute to higher pay and less efficient compensation? Journal of Financial Economics, 90(2), 152–168.CrossRefGoogle Scholar
  16. Bizjak, J., Lemmon, M., & Nguyen, T. (2011). Are all CEOs above average? An empirical analysis of compensation peer groups and pay design. Journal of Financial Economics, 100(3), 538–555.CrossRefGoogle Scholar
  17. Blasi, J. (2017). Tech companies are shutting employees out of the stock market’s boom. Fortune Magazine. Retrieved from http://fortune.com/2017/04/12/tech-stock-market/.
  18. Boatright, J. R. (2010). Executive compensation: Unjust or just right? In G. G. Brenkert & T. L. Beauchamp (Eds.), The Oxford handbook of business ethics. Oxford: Oxford University Press.Google Scholar
  19. Boeri, T., Lucifora, C., & Murphy, K. J. (2013). Executive remuneration and employee performance-related pay: A transatlantic perspective. Oxford: Oxford University Press.CrossRefGoogle Scholar
  20. Buchanan, A. E. (1985). Ethics, efficiency and the market. Oxford: Clarendon.Google Scholar
  21. Chasan, E. (2013). Last gasp for stock options? CFO Journal. The Wall Street Journal, New York, NY. Retrieved from https://blogs.wsj.com/cfo/2013/08/26/last-gasp-for-stock-options/.
  22. Clifford, S. (2017). The CEO pay machine: How it trashes America and how to stop it. New York, NY: Penguin Random House.Google Scholar
  23. Coase, R. H. (1937). The nature of the firm. Economica, 4, 386–405.CrossRefGoogle Scholar
  24. Cole, M. S., Walter, F., Bedeian, A. G., & O’Boyle, E. H. (2012). Job burnout and employee engagement: A meta-analytic examination of construct proliferation. Journal of Management, 38(5), 1550–1581.CrossRefGoogle Scholar
  25. Conyon, M. J., Peck, S. I., & Sadler, G. V. (2009). Compensation consultants and executive pay: Evidence from the United States and the United Kingdom. Academy of Management Perspectives, 23(1), 43–55.CrossRefGoogle Scholar
  26. Cowen, A. P., King, A. W., & Marcel, J. J. (2016). CEO severance agreements: A theoretical examination and research agenda. Academy of Management Review, 41(1), 151–169.CrossRefGoogle Scholar
  27. Cowherd, D. M., & Levine, D. I. (1992). Product quality and pay equity between lower-level employees and top management: An investigation of distributive justice theory. Administrative Science Quarterly, 37(2), 302–320.CrossRefGoogle Scholar
  28. Damodaran, A. (2015). CEO compensation: The pricing and valuing of top managers! ValueWalk, New York, NY. Retrieved from http://www.valuewalk.com/2015/04/ceo-compensation-the-pricing-and-valuing-of-top-managers.
  29. Di Prete, T. A., Eirich, G. M., & Pittinsky, M. (2010). Compensation benchmarking, leapfrogs, and the surge in executive pay. American Journal of Sociology, 115(6), 1671–1712.CrossRefGoogle Scholar
  30. El-Hajji, M. A. (2015). The Hay system of job evaluation: A critical analysis. Journal of Human Resources, 3(1), 1–22.CrossRefGoogle Scholar
  31. Eyal, N. (2012). Informed consent. In E. N. Zalta (Ed.), The Stanford encyclopedia of philosophy. Retrieved from http://plato.stanford.edu/archives/fall2012/entries/informed-consent.
  32. Faulkender, M., & Yang, J. (2010). Inside the black box: The role and composition of compensation peer groups. Journal of Financial Economics, 96(2), 257–270.CrossRefGoogle Scholar
  33. Feinberg, J. (1970). Doing & deserving: Essays in the theory of responsibility. Princeton, NJ: Princeton University Press.Google Scholar
  34. Feldman, F., & Skow, B. (2015). Desert. In E. N. Zalta (Ed.), The Stanford encyclopedia of philosophy. Retrieved from http://plato.stanford.edu/archives/win2015/entries/desert.
  35. Fiss, P. C. (2007). A set-theoretic approach to organizational configurations. Academy of Management Review, 32(4), 1180–1198.CrossRefGoogle Scholar
  36. Fredrickson, J. W., Davis-Blake, A., & Sanders, W. G. (2010). Sharing the wealth: Social comparisons and pay dispersion in the CEO’s top team. Strategic Management Journal, 31(10), 1031–1053.CrossRefGoogle Scholar
  37. Frydman, C., & Jenter, D. (2010). CEO compensation. Annual Review of Financial Economics, 2(1), 75–102.CrossRefGoogle Scholar
  38. Frydman, C., & Saks, R. E. (2010). Executive compensation: A new view from a long-term perspective, 1936–2005. Review of Financial Studies, 23(5), 2099–2138.CrossRefGoogle Scholar
  39. Gao, H., Luo, J., & Tang, T. (2015). Effects of managerial labor market on executive compensation: Evidence from job-hopping. Journal of Accounting and Economics, 59(2), 203–220.CrossRefGoogle Scholar
  40. Ghoshal, S. (2005). Bad management theories are destroying good management practices. Academy of Management Learning & Education, 4(1), 75–91.CrossRefGoogle Scholar
  41. Greckhamer, T. (2011). Cross-cultural differences in compensation level and inequality across occupations: A set-theoretic analysis. Organization Studies, 32(1), 85–115.CrossRefGoogle Scholar
  42. Greckhamer, T. (2016). CEO compensation in relation to worker compensation across countries: The configurational impact of country-level institutions. Strategic Management Journal, 37(4), 793–815.CrossRefGoogle Scholar
  43. Gross, S. E., & Rook, M. (2015). Using a total rewards strategy to achieve competitive advantage. In L. A. Berger & D. R. Berger (Eds.), The compensation handbook (pp. 13–26). New York, NY: McGraw-Hill.Google Scholar
  44. Harman, G. (1975). Moral relativism defended. The Philosophical Review, 84(1), 3–22.CrossRefGoogle Scholar
  45. Harris, J. D. (2006). How much is too much? A theoretical analysis of executive compensation from the standpoint of distributive justice. In R. W. Kolb (Ed.), The ethics of executive compensation (pp. 67–86). Malden, MA: Wiley-Blackwell.Google Scholar
  46. Harvard Business Review. (2014). The whys and wherefores of executive pay. Harvard Business Review, 92(7/8), 32–33.Google Scholar
  47. Hermalin, B. E. (2005). Trends in corporate governance. The Journal of Finance, 60(5), 2351–2384.CrossRefGoogle Scholar
  48. Hewitt, A. (2012). 2012 Trends in global employee engagement. Aon Corporation.Google Scholar
  49. Himmelberg, C. P., & Hubbard, R. G. (2000). Incentive pay and the market for CEOs: An analysis of pay-for-performance sensitivity. New York, NY: Columbia University.Google Scholar
  50. Hofstede, G. H., Hofstede, G. J., & Minkov, M. (2010). Cultures and firms: Software of the mind: Intercultural cooperation and its importance for survival. New York, NY: McGraw-Hill.Google Scholar
  51. Holmstrom, B. (1979). Moral hazard and observability. The Bell Journal of Economics, 10(1), 74–91.Google Scholar
  52. Holmstrom, B. (1982). Moral hazard in teams. The Bell Journal of Economics, 13(2), 324–340.Google Scholar
  53. Holmstrom, B., & Kaplan, S. N. (2003). The state of US corporate governance: What’s right and what’s wrong? Journal of Applied Corporate Finance, 15(3), 8–20.CrossRefGoogle Scholar
  54. Holmstrom, B., & Milgrom, P. (1991). Multitask principal-agent analyses: Incentive contracts, asset ownership, and job design. Journal of Law Economics and Organization, 7, 24–52.CrossRefGoogle Scholar
  55. Jeffrey, S. (2004). The benefits of tangible non-monetary incentives. Chicago, IL: University of Chicago, Graduate School of Business.Google Scholar
  56. Jeffrey, S. A. (2009). Justifiability and the motivational power of tangible noncash incentives. Human Performance, 22(2), 143–155.CrossRefGoogle Scholar
  57. Jensen, M. C., & Murphy, K. J. (1990a). Performance pay and top-management incentives. Journal of Political Economy, 98(2), 225–264.CrossRefGoogle Scholar
  58. Jensen, M. C., & Murphy, K. J. (1990b). CEO incentives: It’s not how much you pay, but how. Harvard Business Review, 68(3), 138–149.Google Scholar
  59. Jensen, M. C., Murphy, K. J., & Wruck, E. G. (2004). Remuneration: Where we’ve been, how we got to here, what are the problems, and how to fix them. Finance working paper, European Corporate Governance Institute, Brussels, Belgium.Google Scholar
  60. Kahn, W. A. (1990). Psychological conditions of personal engagement and disengagement at work. Academy of Management Journal, 33(4), 692–724.CrossRefGoogle Scholar
  61. Kahneman, D., & Tversky, A. (2008). Choices, values and frames (p. 840). Cambridge: Cambridge University Press.Google Scholar
  62. Khurana, R. (2007). From higher aims to hired hands: The social transformation of American business schools and the unfulfilled promise of management as a profession. Princeton, NJ: Princeton University Press.Google Scholar
  63. Kolb, R. W. (2012). Too much is not enough: Incentives in executive compensation. New York, NY: Oxford University Press.CrossRefGoogle Scholar
  64. Krausz, M. (1989). Relativism: Interpretation and confrontation. IN: University of Notre Dame Press.Google Scholar
  65. Krausz, M. (2010). Relativism: A contemporary anthology. New York, NY: Columbia University Press.Google Scholar
  66. Lambert, R. A. (2001). Contracting theory and accounting. Journal of Accounting and Economics, 32(1), 3–87.CrossRefGoogle Scholar
  67. Laurentian Bank of Canada. (2016). Management proxy circular. Montréal, QC: Laurentian Bank.Google Scholar
  68. Le Grand, J. (1990). Equity versus efficiency: The elusive trade-off. Ethics, 100(3), 554–568.CrossRefGoogle Scholar
  69. Legrand, J., & Bartlett, W. (1993). Quasi-markets and social policy. London: MacMillan.Google Scholar
  70. Leinwand, P., & Mainardi, C. (2010). The coherence premium. Harvard Business Review, Boston, MA. Retrieved from https://hbr.org/2010/06/the-coherence-premium.
  71. McMahon, C. (2013). Public capitalism: The political authority of corporate executives. Philadelphia, PA: University of Pennsylvania Press.Google Scholar
  72. Milkovich, G. T., Newman, J. M., & Gerhart, B. A. (2014). Compensation (11th ed.). New York, NY: McGraw-Hill/Irwin.Google Scholar
  73. Mintzberg, H. (1982). A note on that dirty word efficiency. Interfaces, 12(5), 101–105.CrossRefGoogle Scholar
  74. Mishel, L., & Sabadish, N. (2012). CEO pay and the top 1%: How executive compensation and financial-sector pay have fueled income inequality. Washington, DC: Issue brief, Economic Policy Institute.Google Scholar
  75. Mishel, L., & Schieder, J. (2017). CEO pay remains high relative to the pay of typical workers and high-wage earners. Report, Economic Policy Institute, Washington, DC.Google Scholar
  76. Mone, E., Eisinger, C., Guggenheim, K., Price, B., & Stine, C. (2011). Performance management at the wheel: Driving employee engagement in firms. Journal of Business and Psychology, 26(2), 205–212.CrossRefGoogle Scholar
  77. Moriarty, J. (2005). Do CEOs get paid too much? Business Ethics Quarterly, 15(2), 257–281.CrossRefGoogle Scholar
  78. Moriarty, J. (2006). How to (try to) justify CEO pay. In R. W. Kolb (Ed.), The ethics of executive compensation. Malden, MA: Wiley-Blackwell.Google Scholar
  79. Murphy, M. (2015). The big number. Wall Street Journal, New York, NY. Retrieved from http://www.wsj.com/articles/the-big-number-1445904434.
  80. Murphy, K. J., & Zabojnik, J. (2004). CEO pay and appointments: A market-based explanation for recent trends. The American Economic Review, 94(2), 192–196.CrossRefGoogle Scholar
  81. Néron, P.-Y. (2015). Egalitarianism and executive compensation: A relational argument. Journal of Business Ethics, 132(1), 171–184.CrossRefGoogle Scholar
  82. Nozick, R. (1974). Anarchy, state, and utopia. New York, NY: Basic Books.Google Scholar
  83. Olsaretti, S. (2004). Liberty, desert and the market: A philosophical study. Cambridge: Cambridge University Press.CrossRefGoogle Scholar
  84. Oyer, P. (2004). Why do firms use incentives that have no incentive effects? The Journal of Finance, 59(4), 1619–1650.CrossRefGoogle Scholar
  85. Piketty, T. (2014). Capital in the twenty-first century (A. Goldhammer, Trans.). Cambridge, MA: The Belknap Press of Harvard University Press.Google Scholar
  86. Rajgopal, S., Taylor, D., & Venkatachalam, M. (2012). Frictions in the CEO labor market: The role of talent agents in CEO compensation. Contemporary Accounting Research, 29(1), 119–151.CrossRefGoogle Scholar
  87. Rich, B. L., Lepine, J. A., & Crawford, E. R. (2010). Job engagement: Antecedents and effects on job performance. Academy of Management Journal, 53(3), 617–635.CrossRefGoogle Scholar
  88. Saks, A. M. (2006). Antecedents and consequences of employee engagement. Journal of Managerial Psychology, 21(7), 600–619.CrossRefGoogle Scholar
  89. Schellhardt, T. D. (1998). Executive pay (A special report): Pay checks. They show them the money: Lawyer-agents like Robert J. Stucker help executives win the big bucks—And not overlook the fine print. New York, NY: The Wall Street Pub.Google Scholar
  90. Schumpeter, J. (1942). Creative destructionCapitalism, socialism and democracy (Vol. 825). Reedited by Routledge, May 13, 2013.Google Scholar
  91. Scott, D., McMullen, T., & Royal, M. (2011). Reward fairness. Scottsdale AR: Report, WorldatWork.Google Scholar
  92. Securities and Exchange Commission. (2006). Final rules 33-8732a, Item 402(b)(2)(xiv). Washington, D.C.Google Scholar
  93. Shaw, W. H. (2006). Justice, incentives, and executive compensation. In R. W. Kolb (Ed.), The ethics of executive compensation (pp. 87–100). Malden, MA: Wiley-Blackwell.Google Scholar
  94. Sorenson, S., & Garman, K. (2013). How to tackle U.S. employees’ stagnating engagement. Gallup, Washington. Retrieved from Gallup http://news.gallup.com/businessjournal/162953/tackle-employees-stagnating-engagement.aspx.
  95. Stadler, C. (2015). How to become a CEO: These are the steps you should take. Forbes Magazine, New York, NY. Retrieved from https://www.forbes.com/sites/christianstadler/2015/03/12/how-to-become-a-ceo-these-are-the-steps-you-should-take/#4016d7ce1217.
  96. Stiglitz, J. E. (2015). The great divide: Unequal societies and what we can do about them. New York, NY: W. W. Norton & Company.Google Scholar
  97. St-Onge, S. (2014). Gestion de la rémunération—Théorie et pratique. Montréal, QC: Chenelière Education.Google Scholar
  98. Sur, S., Magnan, M., & Cordeiro, J. (2015). Disentangling CEO compensation: A simultaneous examination of time, industry, and firm-level effects. Canadian Journal of Administrative Sciences/Revue Canadienne des Sciences de l’Administration, 32(1), 30–46.CrossRefGoogle Scholar
  99. Tomasello, M. (1999). The cultural origins of human cognition. Cambridge, MA: Harvard University Press.Google Scholar
  100. Tomasi, J. (2012). Free market fairness. Princeton, NJ: Princeton University Press.CrossRefGoogle Scholar
  101. United Technologies Corporation. (2016). Annual proxy statement. Farmington, CT: United Technologies Corporation.Google Scholar
  102. Van Dyke, M. (2015). Base salary: Using non-monetary awards to support behaviors that drive business results. The compensation handbook: A state-of-the-art guide to compensation strategy and design (pp. 143–156). New York: McGraw-Hill.Google Scholar
  103. Williamson, O. E. (1975). Markets and hierarchies, analysis and antitrust implications: A study in the economics of internal organization. New York, NY: Free Press.Google Scholar
  104. Williamson, O. E. (1981). The economics of organization: The transaction cost approach. American Journal of Sociology, 87, 548–577.CrossRefGoogle Scholar

Copyright information

© Springer Science+Business Media B.V., part of Springer Nature 2018

Authors and Affiliations

  1. 1.John Molson School of BusinessConcordia UniversityMontrealCanada
  2. 2.École des sciences de la gestionUniversité du Québec à Montréal, Downtown StationMontrealCanada

Personalised recommendations