In theory, the position of Chief Executive Officer is awarded to the most valuable employee in a given firm. In theory, a firm’s success depends on CEO’s dedication to its firm and employees, his unwavering work ethic, and perhaps most important of all, his ability to perform. In theory, that CEO’s compensation is more or less tied to this ability to perform: decreasing when the company’s profitability suffers, or increasing when its figures soar. Realistically, this is not at all the case. In recent years, the public finally began to take notice of what was happening. The US is particularly notorious for lavishly compensating its corporate executives regardless of their actual contributions to the firms or society. Moreover, these positions too frequently occupied by the unqualified: those who by some means or another politically secured a hand on the throne. Lastly, this disproportionate, centralized concentration of wealth has profoundly detrimental affects on the rest of the country, namely those resting outside of the one percent. How is it possible that despite battling one of the toughest economic times in history, the CEO of Viacom, Phillipe Dauman, pulled in $84.5 million? Why did Stanley Black and Decker CEO John F. Lundgrem see a 253 % compensation increase when his company’s profitability dropped by 13% (New York Times)? While movements such as Occupy Wall Street, and organizations such as the AFL-CIO have greatly helped raise public awareness to these issues, most non-executives would most likely describe these practices as unethical, or even more so, unfair. That being said, this paper will analyze the executive compensations in the U.S. from a Rawlsian perspective. By using Rawl’s Theory of Justice, the paper will seek to reveal the unethical nature of these compensations, and conclude that the current system can hardly be described as just.
Rawls’ Theory of Justice provides an effective lens through which one can evaluate executive compensation. The theory imagines a group of individuals asked to determine a set of governing principles for an ideal society. Rawls’ contract differs from other social contracts in that it assumes each individual is “rational and mutually disinterested” (Sandel 203-21). Furthermore, his social contract is guided by “the principles that free and rational persons concerned to further their own interests would accept in an initial position of equality as defining the fundamental terms of their association” (Sandel 203-21). In Rawls’ theory, people are asked to operate behind a “veil of ignorance” that covers up any knowledge of one’s future success, meaning the future CEOs of Wall Street would hypothetically have no way of knowing their future titles and successes. This theoretical framework is referred to as the “original position,” where “no one knows his place in society, his class position or social status, nor…is advantaged or disadvantaged in the choice of principles” (Sandel 203-21). Rawls believed that if this situation should occur, free, rational, and completely self-interested individuals would collectively devise a set of principles that all regard as fair (Rawls 12). While he is careful to avoid equating the two concepts of fairness and justice, he held that a society which arises from a fair situation would inevitably be more just (Rawls 13).
His first principle holds that every individual should enjoy the right to exercise basic liberties, as suitable with the liberties of other individuals (Sandel 203-21). He goes on to specify some of these liberties, including freedom of speech, the right to vote, and several others currently guaranteed by the Constitution. His second principle holds that “social and economic inequalities [should] be arranged so that they are both (a) reasonably expected to be everyone’s advantage, and (b) attached to positions and offices open to all” (Sandel 203-21). To clarify, Rawls is referring to the distribution of wealth and the hierarchal design of business organizations. Rawls believes the principles must be taken in order, with the first principle taking higher precedence than the second.The first principle creates justice by guaranteeing the citizens of a society the basic rights that all citizens should be free to enjoy. Without the guaranteed freedom of speech, for example, the falsely accused might theoretically be unable to defend themselves. The second principle creates justice by attempting to ensure the well being of everyone in a society, not just the top percent. And therein lies what would be Rawls set of contentions with the current financial state of the country.
As noted by his second principle, the distribution of wealth and income is meant to work to everyone’s advantage. Currently, the top 20% of the country accounts for over 80% of the total wealth (Gilson). While it’s difficult to ascertain what occupations specifically account for these figures, an estimated 44.9% of total wealth corporate executives and financial professionals. Rawls would argue that they should not be paid to the extent that it harms others in our society. From this information, it seems quite clear that these compensations do, in fact, harm other members of our society. He does not believe that the distribution of wealth be equal amongst all citizens. Rather, it must simply work to the advantage of everyone. As you can see from the charts, the distribution of wealth in the U.S. is completely absurd.
Secondly, Rawls held that “positions of authority and offices of command must be accessible to all” (Sandel 203-21). Since the majority of high executive positions are held by millionaires from privileged backgrounds, Rawls would again be disappointed. As one can see from the chart below, one’s chances of becoming a millionaire (most CEOS are) are one in twenty two if you aren’t already in the top percent (Gilson). This inequaltiy of opportunity directly violates the second principle, as accessibility to authority-wielding positions is only available to the few and fortunate.
In conclusion, it seems that the country’s economic situation and a firm’s measured performance have little to do with executive compensations. The rich tend to stay rich or get richer, while the rest of the country’s laborers struggle merely to remain in their socio-economic class. Rawls would be an avid supporter of the Occupy Wall Street movement, and fight alongside the 99% for economic justice and liberty. Overall, John Rawls would be thoroughly dissatisfied with the current distribution of wealth and income in the United States. He would argue that excessive executive payouts do not work to everyone’s advantage and that the positions of authority are not reasonably available to all. Furthermore, Rawls would label our societal structure as unjust, and having stemmed from anything but his concept of the original position. With disparity between the wealthy and impoverished growing more every year, Rawls would truly turn over in his grave.
Gilson, Dave. “It’s the Inequality, Stupid.” Mother Jones. Mother Jones, Apr 2011. Web. 4 Nov 2011. <http://motherjones.com/politics/2011/02/income-inequality-in-america-chart-graph>.
“John Rawls.” Photograph. Star Media. Web. 4 Nov 2011. <http://top-people.starmedia.com/tmp/swotti/cacheAM9OBIBYYXDSCW==UGVVCGXLLVBLB3BSZQ==/imgJohn Rawls1.jpg>.
Lafley, A.G. “Executive Pay: Time for CEOs to Take a Stand. Harvard Business Review. (2010): n. page. Print.
Rawls, John. A Theory of Justice. 1st ed. Cambridge, MA: Harvard University Press, 1971. Print. (Rawls)
Sandel, Michael J. Justice: A Reader. New York, New York: Oxford University Press, Inc., 2007. 203-21. Print. (Sandel 203-21)
“The Pay at the Top.” The New York Times. The New York Times Company, 09 Apr 2011. Web. 3 Nov 2011. <http://projects.nytimes.com/executive_compensation>.