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The rising rate of executive salaries increases is unethical in light of problems facing North American businesses including the threat of global competition. Among the problems is the fact that executives are getting wealthy and receiving huge compensation packages while jobs are being eliminated by automation or by moving operations offshore. Another reason many executive compensation plans are unethical, is that they are fundamentally unfair. Specifically, it is not uncommon for a CEO of a publicly traded company to earn 200 to 300 times what the average employee in their company earns in a year. Another ethical problem is the fact that many compensation demands by CEOs are essentially rubber stamped by the Board of Directors compensation committee. It is also both ill advised and unethical to pay CEOs without respect to the financial performance of the company, which suggests that far more compensation to senior executives should be variable compensation and much less should be fixed compensation. According to an article written by Jason Gabrielli and published in Business Insight , the term greed evokes images of ruthless corporate executives plundering companies and ruining

lives to support a lifestyle marked by excess. However, applying this label to all corporate executives is not accurate despite the fact that corporate corruption has been front page news ever since well known companies including Global Crossing, Enron, WorldCom and Adelphia filed for bankruptcy protection shocking creditors, banks, shareholders, employees and the public. Many critics of corporate America believe that one issue remains excessive executive compensation. According to Gabrielli, executives of large, publicly traded companies are usually highly compensated for their services even when performance measures such as stock performance make it seem like they are not capable of doing what they were hired to complete. In 1982, the average CEO earned 42 times the average worker. By 2001, the ratio had ballooned to 411-to-1. To put that in perspective, by late afternoon on January 1, in many companies the top executive has already earned more than the average worker will earn for the entire calendar year. The previous paragraph implies that corporate executives are being excessively compensated. The issue of executive compensation boils down to essentially one premise: executives

should be compensated based on their job performance as determined by financial measures such as stock market performance, revenues, or profits. Some aspects of executive performance, like knowing when to cut costs through layoffs, necessitate making tough decisions. Therefore, to base a CEOs compensation solely on stock performance when the company is undergoing fundamental change resulting in short-term losses to ensure long term success, it would be unfair to look only at stock price or profits when determining the rate of increase for the CEO or senior executive because in this scenario the CEOs real value lies in their ability to properly manage change. By 2002, average executive compensation was about 200 times that of the average employee. On the surface, this appears excessive. However, if most of the executive compensation is centered in stock options the changes in compensation during the boom of the 1990s can be attributed in large part to a hot stock market. As a result, stock options issued during these years rose in value right along with the general stock market. Thus, a large share of the rise in executive compensation can be directly traced back to the issuance of stock options.

However, stock options are not as popular for middle managers and lower level employees. Leo Jakobson and Jeanie Casison writing in Incentive (2004) explain that many companies are cutting back on stock options, at least among middle managers and workers. Reporting on a recent survey of 336 companies, the authors report that the number of lower-level employees receiving stock options dropped from 37 percent in 2002 to 27 percent in 2003 (Jakobson, Casison, 2004, 9). According to Jason Gabrielli in Business Insight, up until recently, stock options represented an irresistible financial instrument for companies to pay both their executives and employees. In 1995, the Financial Accounting Standards Board issued FAS 123 that established the financial accounting standards for the expensing of stock options. These standards do not require that a company expense the cost of these options on their annual income statements. This measure effectively allows companies not to report the cost of stock options to stockholders. Therefore, companies are free to enrich executives at very little cost. Therefore, it is easy to understand how and why stock grants and

stock options have become a desirable form of compensation to key executives (Gabrielli, 2005). According to an essay published on the Center for Corporate Policy website median pay among the top 100 executives rose from 35 times that of the average worker to more than 500 times as much. Shareholder activism around this issue has exploded in recent years, forcing some executives to take a pay cut. Yet the CEO-to-worker pay gap at the S&P 500 is still at least 300-to-1 in 2003. Several approaches have been suggested to address excessive executive compensation including these: 1. Cap CEO compensation through a maximum wage

concept. This can be done by eliminating tax deductions for executive compensation above a certain amount such as above 25 times that of the lowest-paid employee 2. Limit the use of stock options as a form of executive

compensation. These options provide incentives for senior managers to commit accounting fraud. 3. Cap CEOs total compensation for companies under

bankruptcy protection.

4.

Limit executive management pay to a specific dollar

level in companies receiving government contracts or some form of government assistance. 5. Prohibit what have come to be known as stealth forms of

executive compensation including signing bonuses, and the practice of re-issuing stock options at a lower exercise or strike price when the value of the stock drops in the open market.
6.

Recognize that performance evaluation is often

substantially less comprehensive than would be required by the same CEO in evaluating other executives within the organization. For example, the Vice President of Sales may actually be held to higher standards than the CEO.
7.

Encourage compensation committees to be diligent.

Remember that there is a tendency for compensation committees to focus largely on compensation and far less on performance evaluation, coaching, and management succession planning.
8.

Accept the idea that the subjective nature of CEO

performance evaluation implies the need for a certain number

of members of the Board who are actually independent (Failing the "Acid Test", 2004). Several large companies have undertaken some admirable reforms. In December of 2005, Delta Airlines agreed to submit executive severance packages to shareholders for approval if the packages exceed a certain limit. There is nothing wrong with generously rewarding corporate executives for a job well done, however the government is not in a position to judge what constitutes excessive or overly generous compensation. According to a policy statement on executive compensation published on the TIAA-CREF website, ultimately a corporations Board of Directors is responsible for ensuring that a compensation program is in place which will attract, retain and motivate a strong senior management team. TIAA-CREF believes that aligning the rewards of senior executives with those of shareholders will enhance the long-term performance of the corporation. The corporations compensation committee also believes that compensation programs that reward superior performance play a critical role in aligning the efforts of senior management with the

expectations of the companys shareholders, creditors, employees and other stakeholders. In developing its executive compensation plan, TAII-CREF uses these principles to ensure that its compensation program is competitive, motivating and ethically justifiable 1. Compensation plans should be reasonable and fair based

on prevailing industry standards. 2. It must be capable of withstanding the critical scrutiny of

investors, employees and the public at large. 3. Compensation plans should be appropriate to the

corporations size, complexity and its financial performance. 4. There must be full and complete disclosure to

shareholders about executive compensation plans so that investors can evaluate and comment on them. 5. In setting compensation levels and incentive

opportunities, the board should consider the individuals experience, expertise, responsibilities and goals and objectives, in addition to overall corporate performance.

6.

Compensation plans should encourage employees to

achieve performance objectives that create long-term shareholder value. 7. Compensation plans should be objectively linked to

appropriate parameters of company performance, such as earnings, return on equity, return on assets employed or other relevant financial or operational measures that are within the control of the executives who will receive the pay. 8. Compensation plans should be based on a performance

measurement cycle that is consistent with the business cycle of the corporation. 9. When stock options are awarded, a company should

develop plans for performance-based options that include attainment of specific performance hurdles in order to achieve vesting. 10. Executive pension plans should provide for retirement income formulas that are comparable as a percentage of final average pay to that of employees throughout the organization (Policy Statement on Corporate Governance, 2005).

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In spite of the efforts of companies like TAII-CREF, the wealth gap keeps growing. For example, in 1971 the top 1 percent of North Americans controlled 20.5 percent of North Americas wealth. By 2003, the top one percent of North Americans controlled 38 percent of North Americas wealth. Meanwhile, approximately 30 percent of all workers work in jobs paying what many would consider to be poverty-level wages, and the poorest 40 percent of Americans control just a fraction of Americas wealth. To make CEO compensation more rational and more ethical, some industry experts suggest passing a law that would prevent companies from getting a tax deduction for executive pay more than twenty-five times greater than that of the average employee. Experts believe that a law containing a formula as simple as this would turn the tide of ever increasing rates of executive compensation. According to the book: Pay People Right: Breakthrough Reward Strategies to Create Great Companies Patricia Zingheim and Jay Schuster suggest that the present system of inflated rewards for senior executives in North America is both unethical and impractical. They encourage companies to redesign their

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executive compensation plan to align pay with corporate goals. In effect, they are suggesting that companies communicate their expectations to executives through the compensation plans they offer. They encourage compensation committee to tie executive rewards to measures of company performance in addition to stock price. Zingheim and Schuster suggest that it is critical for companies to strengthen the relationship between pay and performance and specifically they encourage companies to create greater variation in rewards based on differences in the level of results achieved. They encourage compensation plans that have both a large upside component as well as a large downside element. They also suggest the following steps to make executive compensation fairer: 1. Re-mix total compensation so that there is less base pay

and more variable compensation 2. Change executive pay to ensure that short-term profitability

and long-term sustained growth are likely rather than simply possible. Do so by balancing short term and long-term compensation for CEOs and other senior executives.

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3.

Make certain that stock options are used to support the long

term strategic goals of the company not just the achievement of quarterly targets relating to sales, profits and stock price 4. Just as would occur with any other employee, make certain

that CEOs receive a formal evaluation of their performance, and a detailed explanation of any changes in compensation tied to changes in goals
5.

Eliminate interest free or low interest loans made to

executives, particularly unsecured loans or loans made at less than arms length or at lower than the prevailing interest rate for comparable loans (Zingheim et al, 2000). In an article published in CRN, Robert Faletra suggests that executive compensation packages are so extravagant and so out of touch with the best interests of corporations, employees, stockholders and stakeholders that the only approach that is likely to work would involve some form of government intervention. Faletra is deliberately vague about what that mechanism might be, how it would be enforced, what government agency would have oversight, and what formulas would be used to determine the appropriate level of CEO or senior executive compensation.

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Faletras main point is that without the support of federal legislation the Boards of Directors of publicly traded corporations are likely to have limited success trying to stem the tide of excessive compensation unilaterally. Faletra also suggests that if decisions were made on a case-by-case basis within corporate Boardrooms that talented CEOs and senior executives would quickly seek positions with other companies that have not implemented these restrictions. As a result, there would a rapid migration of executive talent from companies with tightly controlled compensation plans to companies that do not impose these restrictions and such upheaval is not likely to be good for the corporation losing one or more key executives in either the short term or the long term (Faletra, 2005, 64). According to an article written by Ed Gubbins, executive bonuses are drawing increased scrutiny from investors, according to compensation experts. Corporate governance regulation brought sweeping reforms in the wake of the Enron and WorldCom scandals, but executive compensation largely eluded regulatory reform. Therefore, it is up to other interested parties such as company retirees, investors and the companys union employees

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to address this problem by capping executive compensation and severance plans, and by excluding retirement fund income from executive bonus formulas. Gubbins writes that executive pay is definitely one of the most pressing issues for stockholders today. Employers are on a tightrope: Corporations realize they need talented people to run the company and have to pay competitively to attract and retain them. Otherwise, talented people will work elsewhere. On the other hand, companies must do a better job of linking executive compensation to short term and long-term goals of the company (Gubbins, 2005, 14). Vadim Liberman writing in Across the Board (2004) offers some unique insights about executive compensation. Liberman explains that it is probably not the dollar levels of compensation that have led to the backlash against corporate excess. Instead, it is the form of compensation that creates temptations on the part of senior executives to use their influence to encourage subordinates to use questionable accounting methods to generate reports showing the sales and profits that will help executives to maximize their compensation levels. According to Liberman, if

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CEOs were paid 100 percent base salary then there would be no reason for them to manipulate the companys books and accounting records. However, when executive compensation is tied directly to short-term financial performance, the incentive is present for executives to manipulate the reported financial results and many CEOs start to look for ways to report better financial performance knowing that their bonuses and stock options are tied to the numbers they report to the Board and to the public. The solutions that present themselves are: 1. 2. Increase the penalties for financial fraud Create work rules that prevent the CEO from influencing

accounting in the preparation of financial statements 3. 4. 5. Have an active Audit Committee Make certain the CA firm is truly independent Make certain there is an adequate ratio of independent

Directors on the Board of Directors 6. Tie compensation for CEOs to both objective and subjective

data, and to short term and long term successes (Liberman, 2004, 59)

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References Failing the "Acid Test". (2004). Retrieved Feb. 17, 2005, from Executive Compensation Web site: http://www.corporatepolicy.org/issues/comp.htm. Faletra, R. (2005). The Government May be the Only Way to Rein in Executive Compensation. CRN, 1132: 64. Gabrielli, J. (2005). Taking the Money: The Issue of Excess Executive Compensation. Insight Business. Gubbins, Ed. (2005). Investors Question CEO Pay. Telephony, 246.2: 14. Jakobson, L., Casison, J. (2004). Bogus Bonus: Companies cut Stock Options to Non-executives. Incentive. 178.2: 9. Liberman, V. (2004). Are You Worth It? Across the Board, 42.1: 59. Zingheim, P., & Schuster, J. (2000). Pay people right: Breakthrough Reward Strategies to Create Great Companies 1st ed. San Francisco: Jossey-Bass Publishers.