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ARTICLE Summary: DO CEOS GET PAID TOO MUCH?

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Article Summary: Do CEOs Get Paid Too Much? The main argument of the article Do CEOs Get Paid Too Much? by Jeffrey Moriarty is that the compensation CEOs receive is more than it should be. The basis for this argument is the fact that the compensation is not justified by the three views of justice in wages. The author argues that CEO’s average compensation of $8 million too much based on the agreement view, the desert view and the utility view. The agreement view says, “a just price for the CEO’s services is one that results from an arm’s-length negotiation between an informed CEO and informed owners” (Moriarty, 2009, p. 693). The author then argues the negotiations, in general, are not at arm’s length. A CEO has the ability to appoint or “wield considerable informal influence over” who becomes the next board member (Moriarty, 2009, p. 694). This creates a feeling of gratitude that compels the newly elected board member to generously repay the CEO with a higher compensation. Also, the board members may not own stock in the company, so there is no incentive to act in the best interest of the shareholders. In addition, these board members are usually CEOs of other firms, so their incentive to pay the CEO higher is that it will increase their own rate because the CEO’s compensation is usually compared to other salaries of CEOs. The author then claims that the $8 million compensation would be justified under this view if the negotiations were conducted at arm’s length. He then concludes that, in general, the negations are not at arm’s length. The author next introduces the desert view, which says to pay the CEO what the CEO deserves to be paid, based on factors like skill level and difficulty. The author states that it is difficult to determine how much a CEO deserves, but he argues “CEOs are not 301 times as deserving as their employees” (Moriarty, 2009, p. 695). In the author’s mind, a CEO is more

ARTICLE Summary: DO CEOS GET PAID TOO MUCH?

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deserving of higher compensation than the worker is, but 301 times the average worker’s salary is unjustified. The author examines the utility view and determines that CEOs are still paid too much. The utility view says that employees should be paid as much as needed to attract and retain the best people, and keep them motivated to maximize wealth. The author argues that an $8 million paycheck is not “necessary to get talented people to become CEOs” (Moriarty, 2009, p. 697). He argues that talented people work as leaders in the military or presidents of universities for far less money, and are equally attracted to that position compared to a CEO position. He then argues that a CEO making $8 million is only a little more talented if at all than a CEO or leader making $1 million per year. He then argues that retention is not a reason to pay CEOs $8 million, because there are not many competing offers. A point the author makes is CEOs who make $8 million do not work that much harder than CEOs who make $1 million. The final point the author makes is that paying a CEO position $8 million per year will force employees to compete harder for that position and this will create tension, jealousy and hostility among the employees. He concludes the paper by offering suggestions as to how much a CEO should be paid. First is to eliminate the CEO’s presence from the director election process. Second, the “directors should be required to make meaningful investments in the firms that they direct” (Moriarty, 2009, p. 701). This will make the board members feel a sense of obligation to the shareholders, since they have a direct interest. I agree with some points the author has made, but disagree with other points. His first argument is based on the agreement view. I agree with this argument, CEOs should not have

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any control over the election process. It contradicts the main point of the election process and the board, which is to act in the best interest of the shareholders. It is only natural that one would feel obligated to repay a person for receiving such a high paying job. The author then states the fact that a CEO’s compensation is based on other CEO’s compensation. If this is the case, a CEO of one company will have self-interest in the compensation of the CEO of another company. If that CEO is on the board of directors for another company, he will be tempted to offer a higher compensation in hopes that it will boost his compensation. This is not right; it is not in the shareholders best interest. I completely agree with the suggestion that CEOs should be removed from the election process. I disagree with the claim that CEOs should not be paid 301 times that of an average worker. Even if it were possible to figure out how much each position contributes to the company in terms of revenue, it would still make sense for a CEO to be highly compensated. First off, a CEO is at a level where only one person can be at that level. There could be millions of workers in a company, and their cumulative salary would be greater that the CEO’s by far. The point is, while CEOs make 301 times that of a worker, there are usually more than 301 workers, so it all balances out. A CEO is faced with expectations and difficulties that the average worker is not faced with. A CEO holds the responsibility for the direction of a company, he is the face of the company, and he must take full responsibility if the company does not succeed where as a single worker is not faced with these stresses. I feel that based on the desert view, a CEO should be paid at least 301 times that of an average worker. I agree with the fact that a CEO being paid $8 million is not that much more talented than a CEO being paid $1 million. However, we judge the CEOs’ case because of the high

ARTICLE Summary: DO CEOS GET PAID TOO MUCH?

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compensation, but this phenomenon happens every day. A newly college graduate may be a more talented, harder working employee compared to employees in the business for a long time, but they are not compensated accordingly. Assume that a newly college graduate and an employee in the business for 20 years are working at the same level in a company. Next, assume that the college graduate is far more skilled with current processes and operations and contributes more to the company compared to the experienced employee. That experienced employee will no doubt be compensated much higher just because of his experience. This happens all the time, and society seems to be fine with it. I feel that a CEO who is paid higher is not necessarily more motivated, higher skilled or more stressed, he may just have been in the business longer so he is compensated more. Society has a problem with the compensation received by CEOs because of the millions spent, but in reality, this phenomenon happens more often than not. This practice is not acceptable in my mind, but if it happens more often than not then I feel a CEO should not be called out on the compensation he receives. I agree with the author when he says CEOs should not have a say in the election process of directors and that CEOs who make $8 million are not that much better than CEOs who make $1 million. I just think that an imbalance in pay is not only happening at the CEO level, so the author should make a more general statement about the main problem and use the CEO as an exaggerated truth to prove a point. I disagree with the fact that CEOs do not deserve of compensation 301 times that of the average worker. I feel that a CEO’s job is absolutely deserving of 301 times that of an average employee.

ARTICLE Summary: DO CEOS GET PAID TOO MUCH?

References Moriarty, Jeffrey. (2009). Do CEOs Get Paid Too Much? In T. Beauchamp, N. Bowie, D. Arnold (Eds.) Ethical Theory and Business Eighth Edition (pp 692-702). Upper Saddle River, NJ: Pearson Education, Inc.

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