There are two main approaches of justifying CEO compensations. The first would be to justify high CEO compensations from a business or a managerial perspective. In other words, we would need to justify the pay-gap between chief executives and ordinary workers. The second would be to justify high CEO compensations from an economic perspective. An economic lens takes into account the rising economic inequalities, which is largely assumed to be non-existent or insubstantial in the first method, as well as taking into account the principals of supply and demand and so on. Using the work of John R. Boatright, Jeffery Moriarty, and Anthony Atkinson, this essay will explore both of these perspectives and argue that high CEO compensations is justified,
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Boatright, in his essay, “Executive Compensation: Unjust or Just Right?” takes a unique approach to provides justification behind high executive compensation. One of his most compelling argument is the CEO Labor Market Argument. Here, Boatright claims that CEOs are different from regular workers as they are entrepreneurs rather than bureaucratic managers. Regular employees have directions to follow and a manager to answer to. Performances in these tasks can be easily managed and observed. However, the performance of an entrepreneur is much harder to gauge and when upon hiring, the firm must trust that the candidate will strive to make “advantageous economic exchanges with the assess they posses” (Boatright p.175) in order to maximize shareholder value. In this sense, CEOs belong in a separate market than the general workforce, which Boatright calls the “CEO Services” (Boatright p.176) industry. In this sense, high level executives “are not merely hired labor” (Boatright p.176), they are in charge of pursuing the “objective of the firm” (Boatright p.176). But the CEO service market isn’t perfect. Boatright claims that it is difficult for firms to not only choose the right candidate for the position, but also identify the candidate pool to pick from (Boatright p.176), resulting in a shortage of supply- driving up the price for a CEO. Further, shareholders do not know how well the CEOs will perform once appointed nor do they know the level of “effort or commitment” (Boatright p.176) or a CEO. This results in the market for CEOs to be “characterized by asymmetric and incomplete information” (Boatright p.176). One of the ways firms (partially) overcome the problems of the CEO market is through “contractual means” (Boatright p.177). One of the most popular example of a contractual means of remedying the market is bonuses. Bonuses allow the boards to pay the CEO in accordance with the expected level of performance with an “insurance policy” (Boatright p.177). If
Boatright, in his essay, “Executive Compensation: Unjust or Just Right?” takes a unique approach to provides justification behind high executive compensation. One of his most compelling argument is the CEO Labor Market Argument. Here, Boatright claims that CEOs are different from regular workers as they are entrepreneurs rather than bureaucratic managers. Regular employees have directions to follow and a manager to answer to. Performances in these tasks can be easily managed and observed. However, the performance of an entrepreneur is much harder to gauge and when upon hiring, the firm must trust that the candidate will strive to make “advantageous economic exchanges with the assess they posses” (Boatright p.175) in order to maximize shareholder value. In this sense, CEOs belong in a separate market than the general workforce, which Boatright calls the “CEO Services” (Boatright p.176) industry. In this sense, high level executives “are not merely hired labor” (Boatright p.176), they are in charge of pursuing the “objective of the firm” (Boatright p.176). But the CEO service market isn’t perfect. Boatright claims that it is difficult for firms to not only choose the right candidate for the position, but also identify the candidate pool to pick from (Boatright p.176), resulting in a shortage of supply- driving up the price for a CEO. Further, shareholders do not know how well the CEOs will perform once appointed nor do they know the level of “effort or commitment” (Boatright p.176) or a CEO. This results in the market for CEOs to be “characterized by asymmetric and incomplete information” (Boatright p.176). One of the ways firms (partially) overcome the problems of the CEO market is through “contractual means” (Boatright p.177). One of the most popular example of a contractual means of remedying the market is bonuses. Bonuses allow the boards to pay the CEO in accordance with the expected level of performance with an “insurance policy” (Boatright p.177). If