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Ethics of Compensation

In: Business and Management

Submitted By nextar7000
Words 668
Pages 3
The issue of ethics in the corporate world has been widely talked about over the last decade. Corporate scandals almost seem like a part of everyday life. The nation’s response is to inform students of ethical conduct and hold organizations to a higher standard. This will hold CEOs and management responsible for all fraudulent acts committed by an organization. The ethical spotlight has now turned to CEO compensation due to the recent decline in the economy.

The focus point of those public discussions has been to try and get a better position to influence CEO compensation packages. Determining a CEO compensation package and commitment that does not place undue pressure on the CEO to taint financial statements, provide excessive perks, approve stock option scandals to occur, and let outrageous severance packages could be a giant step in the right direction toward an ethical foundation in the business community. Perhaps CEO compensation packages are not the cause of corporate scandals, but sometimes they do push CEOs into making improper and unethical decisions. The relationship between CEO compensation is parallel to being an ethical company, and having long term success
Executive compensation has risen significantly in past ten years. These increases are difficult to comprehend considering profits and stock prices of the only increased by 11% and 23% respectively as of 2008. Although the increase in market value created an environment for increasing compensation without much criticism from outsiders, are these levels ethical? The economic principle of supply and demand offers an explanation of the compensation market equilibrium. A job has economic value to the employer that created the position. The price to fill the position is determined by the forces of supply and demand. As with all other commodities, when the demand for a particular service increases, the price rises. If the supply of the commodity increases, the value of the service declines due to the abundance and competitive pricing. The position of an executive is not one that can be easily filled as it requires a certain degree of skill, experience, and knowledge of the industry resulting in a low level of supply. As demand for executives began to rise, firms increased their compensation packages in an attempt to keep talent within their firm
Companies choose top executives’ compensation plans in different ways. The larger the market capitalization of a firm, the larger that company’s CEO compensation will be. Companies need to have an income gap in the different levels in the company. For example, executives should receive more than managers and managers should get more than regularl employees.

The majority of CEO and management compensation comes from stock options. This allows the CEO to purchase shares in company stock at a set amount that can be significantly lower than market value. Stock options can create an environment conducive to unethical behavior. Stock options present short term decision making, which can be harmful to the company’s long term success. CEOs may also be able to obtain a significant percentage of controlling stock. The most damaging effect of high CEO incentive packages is the emphasis on short term profits without regard to long term strategy. This strategy has a negative impact on long term goals and success.

So the question is if it is ethical for CEO to receive higher compensation during a decline in profitability. In my opinion, it is highly unethical but should also be determine by the level compensation versus the level of profitability. American Airline CEO Gerard Arpey received $5.2 million in total compensation, in 2010. The same year the parent company of American Airlines was the only significant U.S. carrier to record a loss. Arpey's compensation grew 11 percent over 2009, boosted by an increase in stock awards and options that was granted in May. Last year, AMR posted a $471 million loss while other leading carriers reported profits. And with rising fuel costs, the Fort Worth-based company reported a $436 million loss for the first quarter

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