Ethical Compensation Research Paper
ETHICAL COMPENSATION
Final Paper
Kyle McCluskey
August 13th, 2010 Ethical Compensation The definition of ethical compensation is that the standards, principles or rules that give guidelines for morally correct behavior and for honesty in payment and reward of employees. Intellectuals feel that ethics involve more than just legal observance. Managers on the other hand choose to do more than the law requires. Some feel it is a sense of fairness or because it makes sense economically. The law draws a line that management should not fall below in establishing a level of behavior. Employees expect companies to stick to certain standards that represent fairness (Compensation Dilemmas: An Exercise In Ethical Decision-Making 1995). …show more content…
Early efforts of economic views have studied compensation systems over the years. The all-encompassing view at the time was that the best possible compensation systems met the fair day’s wage for a fair day’s work criteria. The key for managers and others who design pay systems is to ensure that pay accurately reflected the economic value added to the firm by a worker. This is where fairness is expressed only in economic terms. Since that time management scholars have developed a much richer understanding of what fairness means to employees and how views of fairness affect their attitudes and behaviors. Compensation systems also play important social and representational roles in organizations and through these roles pay systems affect a variety of important outcomes such as the nature of employee commitment and performance and work relationships. Given the essential role that compensation systems play in employment relationships, it is also very likely that they play an important role in shaping whether people feel they are treated with respect, trust, and dignity and whether they believe the values and customs of the organization are worthy of their fullest commitment and highest efforts (Bloom, M. 2004). Could executive compensation be redefined by performance management? “When no performance measures are defined and documented for company executives, this places no accountability on the CEO to produce measurable results. On the other hand, if performance measures are defined, documented and accountability is placed on the CEO and is tied to compensation this could prove to be beneficial for all involved. While employees are paid based on established job classification systems, CEO’s however arbitrarily negotiate salaries where there is no cap, but rather on what they believe they are worth.” The CEO is obviously the primary benefactor. The company is injured by way of a harmful image in the eyes of the industry. The consumers of the company’s products or services are also hurt. The company may also experience retention problems and stockholders may suffer from financial loss. Also employees are left to deal with disappointment, bitterness and low morale (Carter, C. 2009).
Americans are fuming right now.
Pummeled by the bind of a painful recession and furious over oversized executive compensation packages at the very Wall Street firms widely blamed for the economic chaos, they gradually distrust key establishments and individual leaders. Americans are angered at the financial services region. They believe that these institutions have rigged the game so that top level executives are rewarded substantially even when they fail. Americans want action to restore fairness to the system and get pay back in line. The variety of experts and activists of political leaders and ordinary citizens, there is a belief that executive incentives have exaggerated short-term perfor¬mance, supported unnecessary risk-taking, and failed to discipline poor performance. Many believe that incentive plans have tempted some CEOs to put personal financial interests in front of good stewardship that provides the long-term interests of their organizations (Ethics Resource Center, …show more content…
2010).
In recent years it has become common for corporate board of directors to recruit a star chief executive officer with an executive severance package. The severance agreement becomes part of a contractual commitment that is often unrelated to the circumstances of the executive’s eventual firing. To complicate matters, severance is often structured as deferred compensation for an executive’s earlier successes, before things would eventually fall apart. When a CEO is discredited they always argue that they were not overpaid at termination because the rise in share price they achieved for stockholders during their tenure with the company.
Companies should not make severance commitments when hiring executives. This will come back to haunt them. This style could make it difficult for firms trying to hire top talent. A CEO with ethics would be embarrassed when receiving an abundant severance after their decisions caused severe anguish to the employees and shareholders (Kiplinger, K. 2008). Addressing spe¬cific errors in compensation plans is critical and identifying the best metrics for measuring performance is part of the answer. Maybe creating an ethical organization is a critical first step that sets the stage for effective compensation plans. Ethical performance should be one of the metrics for determining compen¬sation. Many of the problems credited to failed compensation plans are really about ethical slip ups. I’m not saying that executives intentionally engage in bad conduct. But it can mean that a lack of continuous focus on ethics can induce bad behavior. This behavior can turn into rationalizing decisions without truly centering on the allegations for the long-term well-being of the customers, its employees, shareholders and the company as a whole (Ethics Resource Center, 2010). Executive compensation is not illegal. However the actions of some CEO’s and executives can be ethically questionable. From the viewpoint of economic effectiveness, restructuring or even downsizing may be required in order to arrive at specific business goals. Although, making the decision to eliminate jobs while the CEO is overly compensated for providing inadequate performance is not only feeble but questions ones ethical and moral character. Human resource professionals can make a incredible impact by educating board of directors on accountability in executive packages, compensation and incorporating strategic performance management initiatives. Most human resource departments have made major strides to align themselves with becoming strategic partners with top management to overcome the downfall of executive overcompensation (Carter, C. 2009).
References
Bloom, M.
(2004). The ethics of compensation systems Retrieved July 21st, 2010 from http://www.springerlink.com/content/n702477371863286/
Carter, C. (2009). Is executive compensation a matter of ethics?
Retrieved July 21st, 2010 from http://www.articlesbase.com/human-resources-articles/is- executive-compensation-a-matter-of-ethics-742982.html
Ethics Resource Center (2010) Ethical Leadership and Executive Compensation: Rewarding I Integrity in the C-suite. Retrieved July 21st, 2010 from http://www.ethics.org/files/u5/execComp.pdf
Kiplinger, K (2008) Failed CEO’s should take their lumps
Retrieved July 21st, 2010 from http://books.google.com/books?id=aT8j6zFKSzkC&pg=PT17&dq=Ethical+compensation&hl=en&ei=6EdHTOqTA4_0swO92624Ag&sa=X&oi=book_result&ct=result&resnum=2&ved=0CC4Q6AEwAQ#v=onepage&q=Ethical%20compensation&f=false
R. Bruce MacAfee and Claire J. Anderson (1995) Compensation Dilemmas: An Exercise In Ethical Decision-Making
Retrieved July 10th, 2010 from
http://sbaweb.wayne.edu/~absel/bkl/vol22/22bl.pdf
Final Paper
Kyle McCluskey
August 13th, 2010 Ethical Compensation The definition of ethical compensation is that the standards, principles or rules that give guidelines for morally correct behavior and for honesty in payment and reward of employees. Intellectuals feel that ethics involve more than just legal observance. Managers on the other hand choose to do more than the law requires. Some feel it is a sense of fairness or because it makes sense economically. The law draws a line that management should not fall below in establishing a level of behavior. Employees expect companies to stick to certain standards that represent fairness (Compensation Dilemmas: An Exercise In Ethical Decision-Making 1995). …show more content…
Early efforts of economic views have studied compensation systems over the years. The all-encompassing view at the time was that the best possible compensation systems met the fair day’s wage for a fair day’s work criteria. The key for managers and others who design pay systems is to ensure that pay accurately reflected the economic value added to the firm by a worker. This is where fairness is expressed only in economic terms. Since that time management scholars have developed a much richer understanding of what fairness means to employees and how views of fairness affect their attitudes and behaviors. Compensation systems also play important social and representational roles in organizations and through these roles pay systems affect a variety of important outcomes such as the nature of employee commitment and performance and work relationships. Given the essential role that compensation systems play in employment relationships, it is also very likely that they play an important role in shaping whether people feel they are treated with respect, trust, and dignity and whether they believe the values and customs of the organization are worthy of their fullest commitment and highest efforts (Bloom, M. 2004). Could executive compensation be redefined by performance management? “When no performance measures are defined and documented for company executives, this places no accountability on the CEO to produce measurable results. On the other hand, if performance measures are defined, documented and accountability is placed on the CEO and is tied to compensation this could prove to be beneficial for all involved. While employees are paid based on established job classification systems, CEO’s however arbitrarily negotiate salaries where there is no cap, but rather on what they believe they are worth.” The CEO is obviously the primary benefactor. The company is injured by way of a harmful image in the eyes of the industry. The consumers of the company’s products or services are also hurt. The company may also experience retention problems and stockholders may suffer from financial loss. Also employees are left to deal with disappointment, bitterness and low morale (Carter, C. 2009).
Americans are fuming right now.
Pummeled by the bind of a painful recession and furious over oversized executive compensation packages at the very Wall Street firms widely blamed for the economic chaos, they gradually distrust key establishments and individual leaders. Americans are angered at the financial services region. They believe that these institutions have rigged the game so that top level executives are rewarded substantially even when they fail. Americans want action to restore fairness to the system and get pay back in line. The variety of experts and activists of political leaders and ordinary citizens, there is a belief that executive incentives have exaggerated short-term perfor¬mance, supported unnecessary risk-taking, and failed to discipline poor performance. Many believe that incentive plans have tempted some CEOs to put personal financial interests in front of good stewardship that provides the long-term interests of their organizations (Ethics Resource Center, …show more content…
2010).
In recent years it has become common for corporate board of directors to recruit a star chief executive officer with an executive severance package. The severance agreement becomes part of a contractual commitment that is often unrelated to the circumstances of the executive’s eventual firing. To complicate matters, severance is often structured as deferred compensation for an executive’s earlier successes, before things would eventually fall apart. When a CEO is discredited they always argue that they were not overpaid at termination because the rise in share price they achieved for stockholders during their tenure with the company.
Companies should not make severance commitments when hiring executives. This will come back to haunt them. This style could make it difficult for firms trying to hire top talent. A CEO with ethics would be embarrassed when receiving an abundant severance after their decisions caused severe anguish to the employees and shareholders (Kiplinger, K. 2008). Addressing spe¬cific errors in compensation plans is critical and identifying the best metrics for measuring performance is part of the answer. Maybe creating an ethical organization is a critical first step that sets the stage for effective compensation plans. Ethical performance should be one of the metrics for determining compen¬sation. Many of the problems credited to failed compensation plans are really about ethical slip ups. I’m not saying that executives intentionally engage in bad conduct. But it can mean that a lack of continuous focus on ethics can induce bad behavior. This behavior can turn into rationalizing decisions without truly centering on the allegations for the long-term well-being of the customers, its employees, shareholders and the company as a whole (Ethics Resource Center, 2010). Executive compensation is not illegal. However the actions of some CEO’s and executives can be ethically questionable. From the viewpoint of economic effectiveness, restructuring or even downsizing may be required in order to arrive at specific business goals. Although, making the decision to eliminate jobs while the CEO is overly compensated for providing inadequate performance is not only feeble but questions ones ethical and moral character. Human resource professionals can make a incredible impact by educating board of directors on accountability in executive packages, compensation and incorporating strategic performance management initiatives. Most human resource departments have made major strides to align themselves with becoming strategic partners with top management to overcome the downfall of executive overcompensation (Carter, C. 2009).
References
Bloom, M.
(2004). The ethics of compensation systems Retrieved July 21st, 2010 from http://www.springerlink.com/content/n702477371863286/
Carter, C. (2009). Is executive compensation a matter of ethics?
Retrieved July 21st, 2010 from http://www.articlesbase.com/human-resources-articles/is- executive-compensation-a-matter-of-ethics-742982.html
Ethics Resource Center (2010) Ethical Leadership and Executive Compensation: Rewarding I Integrity in the C-suite. Retrieved July 21st, 2010 from http://www.ethics.org/files/u5/execComp.pdf
Kiplinger, K (2008) Failed CEO’s should take their lumps
Retrieved July 21st, 2010 from http://books.google.com/books?id=aT8j6zFKSzkC&pg=PT17&dq=Ethical+compensation&hl=en&ei=6EdHTOqTA4_0swO92624Ag&sa=X&oi=book_result&ct=result&resnum=2&ved=0CC4Q6AEwAQ#v=onepage&q=Ethical%20compensation&f=false
R. Bruce MacAfee and Claire J. Anderson (1995) Compensation Dilemmas: An Exercise In Ethical Decision-Making
Retrieved July 10th, 2010 from
http://sbaweb.wayne.edu/~absel/bkl/vol22/22bl.pdf