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How Much is Too Much?A Theoretical Analysis ofExecutive Compensation from theStandpoint of Distributive JusticeJared HarrisFebruary 19, 2005Markkula Conference, Santa Clara University : 

How Much is Too Much?A Theoretical Analysis ofExecutive Compensation from theStandpoint of Distributive JusticeJared HarrisFebruary 19, 2005Markkula Conference, Santa Clara University

How Much is Too Much? : 

How Much is Too Much? Are CEOs overpaid? Underpaid? 1990 ratio of CEO to a typical worker, 100:1 2000 ratio 350:1 to 570:1 Kettering Foundation Survey … May be commonly held that high CEO pay is objectionable based on greed.

How Much is Too Much? : 

How Much is Too Much? “The salary of the chief executive of a large corporation is not a market award for achievement. It is frequently in the nature of a warm personal gesture by the individual to himself.” - John Kenneth Galbraith

Distributive Justice Theory : 

Distributive Justice Theory 1. John Rawls: Justice as Fairness 2. Amartya Sen Martha Nussbaum: Capabilities and Freedom 3. Robert Nozick: Libertarian Framework

Distributive Justice and CEO Pay : 

Distributive Justice and CEO Pay Theoretical convergence around process Closely related processes of: Executive employment/selection Executive compensation setting Value Proposition Matching “worth” with appropriate pay

Rawls and CEO Pay : 

Rawls and CEO Pay Key part of Rawls’ second principle of justice: “open position” (fair equality of opportunity) Opportunities must be open Exec pay-setting processes: justly determined? If not, likely an indication that selection processes are also unjust or “gamed”

Rawls and CEO Pay : 

Rawls and CEO Pay

Capabilities Theory and CEO Pay : 

Capabilities Theory and CEO Pay Key capability: “the right to seek employment on an equal basis with others” Opportunities must be open Again, if an unjust process in setting executive pay indicates exclusivity in the selection process . . . Then high pay is difficult or impossible to justify

Libertarian View of CEO Pay : 

Libertarian View of CEO Pay Two key assumptions for Nozick’s theory: “justice in acquisition” and “justice in transfer” Assumptions must be met if distributions of wealth or property are to be justified Otherwise, transfer not defensible

Value Proposition of CEO : 

Value Proposition of CEO CEOs should be paid according to their value proposition for the firm and its stakeholders Difficult to explicitly determine Market solves?

Distributive Justice and CEO Pay : 

Distributive Justice and CEO Pay To what extend does this theoretical analysis tell us anything useful? Evidence reinforces validity of theoretical concern Influence our research agenda

Fairness and CEO Pay : 

Fairness and CEO Pay What raises CEO pay? CEO celebrity/notoriety (Hayward, Rindova, & Pollock, 2004; Porac, Wade, & Pollock, 1999) ‘Bandwagoning’ popular management techniques (Staw & Epstein, 2000) Luck (Bertrand & Mullainathan 2001) Friends on compensation committee (Young & Buchholtz 2002; Conyon & Peck, 1998) Non “rubber-stampers” sanctioned (Westphal & Khanna 2003)

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