Wall Street Compensation and Entitlement Theory

For this paper I wanted to delve into the issues of Wall Street compensation and how the entitlement theory of Nozick relates to these issues. In this paper I would like to investigate the concept of compensation packages, contrast the average CEO versus  the average American, and analyze these issues with the Theory of Entitlement from Robert Nozick.  I will use the Ben and Jerry’s case to show examples of huge CEO compensation as well as their refusal to receive any less. I would like to explore these issues and end with my opinion on the ethics of Wall Street compensation especially regarding the principles of Entitlement Theory. Using the Ben and Jerry’s case study and the Theory of Entitlement we can visualize other solutions regarding CEO compensation and public opinion.

The formal side of compensation packages for CEOs is that each company convenes a board, often comprised of other chief officers or former CEOs, who will set out to determine the compensation amount that the chief officers of the company will receive. Pay and compensation for a CEO is usually determined by size of the company and company performance while under the command of the CEO. Compensation packages can come in many different forms but what they have in common these days is that they are almost always extremely large. These compensation packages have become exponentially larger over the last thirty years. From 1980 to 2003 CEO compensation has increased six fold (Gabaix and Landier, p. 1). This increase has not been only relevant to compensation packages, pay has also increased. In 2010 regardless of the poor economic situation, CEO pay increased 27% from the year before (Krantz and Hansen). In addition to pay and compensation rising, CEOs are sending the image that they must be expensive to be a good CEO. This idea is supported in the Ben and Jerry’s case study. Ben and Jerry’s ice cream company was looking for a new CEO and decided they would support social equality by saying that “no employee could make more than five times what the lowest-paid worker was paid”(Torres, p. 2). The entire effort put forth by Ben and Jerry’s  failed and allowed CEOs everywhere to send the idea that will only accept huge salaries and compensation. The Ben and Jerry’s case  allows one to compare the average CEO and the average American.

The reality is that the average American citizen and the average CEO are polar opposites. According to data gathered and analyzed by the AFL-CIO (in April 2011) the average CEO makes 343 times what the average worker makes in the United States,:that is, $11.4 million(Liberto, p. 1). While CEOs are receiving more than ever, costs are rising for the average American whose wages are not keeping up. While the average American is only receiving wage increases of 1.8% of last year, the consumer price index is outpacing them at 3.8%(BLS, p. 1),. However on the other hand, the average CEO is making more than ever before.. This huge gap is extremely worrisome because this is between the average of the highest paid people in the United States and the average American. Hence,  there are people that are paid even less than the average American and CEOs paid more than the average CEO. This means there are people struggling even more in our society and people who are receiving more compensation than the average CEO. The economic disparity between these groups is huge and problematic to our society. This disparity in wealth in our country leads us to have huge social issues with CEO compensation and pay. These social issues are mainly driven by income inequality alone. While the average American is barely keeping up with price increases, CEOs are sending the image to America that they are unaffected by economic crisis and will continue to be paid astronomical wages. Using Nozick’s Entitlement Theory we can use an ethical perspective to analyze these issues.

The entitlement theory by Robert Nozick states that there are three main principles that comprise the Entitlement Theory. The first and most interesting in my opinion, regards how one acquires their initial holdings. This deals with how people acquire their properties. The second principal is how you can acquire your holdings in terms of exchanges and gifts and the third principle is how to deal with unjustly acquired holdings. Nozick believes that if the world were completely just there would be no need for the last principle. However this is an interesting idea when we use it as a lens to examine Wall Street. Is an exorbitant compensation package an unjustly acquired holding? Since we know we do not live in a wholly just world, it makes sense that these unjustly acquired holdings exist. However we should examine if CEO pay and compensation falls in the second or third principle of Entitlement Theory. I think that seeing CEO pay as a holding, it falls under the third principle as an unjustly acquired holding. This holding is unjustly acquired not because they stole their pay or compensation or that it was illegal. Instead the holding is unjust because it is socially unjust. It is a social injustice in my opinion to pay CEOs 343 times as much as the average American (Liberto). This is a social injustice according to Nozick because it unjustly acquired in how it relates to other stakeholders in the company such as the lowest paid workers. Where other workers have a flat or relatively constant pay package, a CEOs pay can change dramatically even as much as year to year. This supports my assertion that it is a social injustice because it is acquired unjustly due to the fact that pay changes can occur for any reason, sometimes deserved but mostly not deserved. This reinforces the negative reputation that CEOs receive.

The position of CEO is portrayed as negative in our society today, especially when you reflect back on the Ben and Jerry’s case study.  When Ben and Jerry’s said they would look for a CEO who would accept no more than five times the lowest paid worker, they came up with no decent applicants who would work for this much (Torres). Therefore they had to change their policy about CEO pay and made it appear that Ben and Jerry’s supported high CEO pay. Nozick would say that Ben and Jerry’s acquired their CEO in a just way however I would argue that they are paying him unjustly. When they didn’t receive applicants because their pay was too low, they used the strategy of increasing the CEO pay that was unjust. There are other ways to attract a CEO than raising the pay and Ben and Jerry’s could have employed other tactics. These other tactics would have been more aligned with the just principles of one and two which Nozick explains in the Entitlement Theory.

In my opinion Ben and Jerry’s could have explored more options to incentivize CEOs to work for less money and instead other options. They could utilize more stock opportunities, which would incentivize CEOs, to make better decisions for the company and therefore effect how their benefits will pan out based on stock price. This gives them a good reason to work hard so that it can eventually pay them off. If there was more of the performance based compensation, it would show the public how CEOs are actually working for and earning their large compensation packages. This would be a huge step in making chief officials of companies more relatable and understandable to the public, and their jobs would have more transparency to the average American. If CEOs made their compensation performance based and tried to make their jobs and duties more clear and transparent to the public there would be great strides made between these two groups to be more understanding of each other.

If CEOs and average Americans can understand their roles in the workforce more there could be important changes made especially in the arena of public opinion and social dissent. Citing the above AFL-CIO statistics, average CEOs and average American are at this moment financially polarized. Using the Ben and Jerry’s case study we can see how CEOs have sent the message that they will not accept less in terms of salary and benefits. However, there can be CEO compensation that is relevant to performance. This would be the best situation especially regarding Nozick’s three principles, which comprise the Entitlement Theory. CEO compensation would be come a just holding and fall under the second principle rather than the third, as a holding that was unjustly acquired. This leads me to the concluding idea that we can use Nozick’s Theory of Entitlement to aid chief officers in being more transparent and understandable to the average American. In my opinion, this will aid chief officers of companies, specifically CEOs in having a more positive public appearance and to become socially just.

Works Cited

Dvorak, Phred. “Limits on Executive Pay; Easy to Set, Hard to Keep.” Yahoo Finance. N.p., n.d. Web. 26 Oct. 2011. <http://finance.yahoo.com/‌career-work/‌article/‌102878/‌Limits-on-Executive-Pay:-Easy-to-Set,-Hard-to-Keep&gt;.

“Earnings.” Bureau of Labor Statistics. N.p., n.d. Web. 26 Oct. 2011. <http://bls.gov/‌news.release/‌pdf/‌wkyeng.pdf&gt;.

Gabaix, Xavier, and Augustin Landier. “Why has CEO pay increased so much?” Quarterly Journal of Economics (Apr. 2007): n. pag. PDF file.

Krantz, Matt, and Barbara Hansen. “CEO pay soars while workers’ pay stalls.” USA Today. USA Today, 4 Apr. 2011. Web. 13 Oct. 2011. <http://www.usatoday.com/‌money/‌companies/‌management/‌story/‌CEO-pay-2010/‌45634384/‌1&gt;.

Liberto, Jennifer. “CEOs earn 343 times more than typical workers.” CNN. CNN, 20 Apr. 2011. Web. 13 Oct. 2011. <http://money.cnn.com/‌2011/‌04/‌19/‌news/‌economy/‌ceo_pay/‌index.htm&gt;.

Torres, Blanca. “Debate Swirls around CEO pay.” Baltimore Sun. Baltimore Sun, n.d. Web. 26 Oct. 2011. <http://www.baltimoresun.com/‌business/‌bal-bz.ex.payequity15may15,0,7160910.story?page=2&gt;.

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One Response to Wall Street Compensation and Entitlement Theory

  1. Jordi says:

    B&J was bought by Unilever, I think, some time ago. I wonder what happened to all their value-driven policies since then? Also, let’s imagine the company held onto them even as it became part of a huge conglomerate. How would linking CEO pay to performance work since it would no longer have its own share price?

    You are spot on about seeing the CEO compensation as an unjust holding. However, why is it unjust? The size does not necessarily make sense. I mean, a multiplier of 334 is too much. Is 5 too little? How would we arrive at the correct average to CEO multiplier? If we look for other reasons it is unjust, what we would come up with? Maybe amount of actual wealth created by various parts of a firm? Amount of growth? New metrics that measure amount of long-term wealth? Can ethical action be made part of this? Or, look at the process- as you say- how were these packages arrived at?

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