knowledge of the highest objects which has received as it were its proper completion.”45 In contrast to narrowly technical or industrial ways of thinking, wisdom is not motivated, as, say, Thomas Edison and Henry Ford surely were, to bring new inventions and improved gadgets into existence.46 Wisdom seeks knowledge for its own sake. It undertakes the search by adopting a contemplative stance. The philosopher, or lover of wisdom, embodies this quest. By “philosopher,” Aristotle does not mean, as we do today, a person engaged in formal scholarship in the fields of logic, metaphysics, aesthetics, epistemology, and ethics. Aristotle's philosopher is the person in search of a complete reckoning of principles behind all reality—spanning human, natural, and divine spheres.
Contemporary Focus Point for Virtue: Executive Compensation
In the wake of the financial crisis, allegations of injustice stemming from apparently undeserved rewards for untalented performance have come to the forefront in discussion about executive compensation on national and international levels.47
Many would say top executives are siphoning off a disproportionate share of the fortunes generated (or worse, not generated) by the organizations under their watch. Studies document a meteoric rise in CEO compensation.48 During 2008, which ushered in dwindling corporate earnings along with sinking share values, most CEOs got compensation hikes, not downgrades.49 In the face of the economic downturn, average CEO compensation for 2008 was only slightly diminished.50 The economic downturn did not inhibit financially distressed firms from granting supersized payouts to high-ranking corporate chiefs.
Who are these corporate leaders who, with the backing of boards of directors that set their pay, are rewarded with ostentatious rewards, so out of step with what everyone else struggles to eke out? What drives their acquisitiveness? Reflection on such questions is absent in all but a handful of studies on executive compensation. Let's drill down into the details of some of these individuals' remuneration arrangements.
At the summit of CEO earnings in the United States for 2008 was Sanjay Jha of Motorola. Despite the firm's precipitous 71 percent drop in shareholder price, he received US$104.4 million.51 Robert Iger, Disney's CEO, was awarded US$51.1 million in 2008. That payment weighed in at almost twice the size of the US$27.7 million it had extended to him the year before.52 The huge rise in pay appears especially openhanded having come about in the same year that Disney's profits experienced a 5 percent decline. At the helm of American Express, Kenneth Chenault, received a reduction of 14.6 percent—dropping from US$50.1 million for 2007 to a paltry US$42.8 million for 2008.53 Yet the reduction did not quite mirror the 29 percent overall fall in profits his company had suffered.54
When AIG started channeling taxpayer bailout money it had received into its executives' paychecks, the public became outraged.55 AIG's former CEO Martin Sullivan, who ran the company into the ground, was set to receive US$47 million in severance when he was fired, prompting New York State Attorney General Andrew Cuomo to place a stop on US$19 million of it.56 In response to the granting of performance bonus awards for AIG top management, Charles Grassley, senior member of the Senate Finance Committee, proclaimed, “The first thing that would make me feel a little bit better towards them [is] if they'd follow the Japanese model and come before the American people and take that deep bow and say I'm sorry, and then do either one of two things—resign, or go commit suicide.”57 Elaborating on the comments, Grassley's spokesperson Jill Gerber clarified that “clearly he was speaking rhetorically—he meant there's no culture of shame and acceptance of responsibility for driving a company into the dirt in this country. If you asked him whether he really wants AIG executives to commit suicide, he'd say of course not. Point being, U.S. corporate executives are unapologetic about running their companies adrift, accepting billions of tax dollars to help, and then spending those tax dollars on travel, huge bonuses, etc.”58
In directing the Treasury Department to pursue all available legal means of reclaiming the funds, President Obama described the bonuses as an “outrage.”59 Ohio Representative Dennis Kucinich called upon the SEC to launch an inquiry after the financially distressed Merrill Lynch doled out US$3.62 billion of the Troubled Asset Relief Program (“TARP”) funds it had received as executive bonuses.60 In Kucinich's words, the bonuses were “little more than a farewell gift from senior management to themselves.”61 Amounting to more than twenty-two times the size of AIG's bonuses, the Merrill Lynch executive disbursements constituted 36.2 percent of its TARP allotment.62
Adding to the dubious nature of any linkage between executive performance and financial reward, comes the extraordinary practice of companies lavishing enormous riches on CEOs even as they are firing them for failing on their jobs.63 Upon incurring the biggest financial loss in corporate history, Merrill Lynch terminated its CEO, Stanley O'Neal. Yet that did not keep him from walking away with a sizable severance package totaling US$160 million.64 Consider also the case of Home Depot's former leader Robert Nardelli. Even though he had been discharged as a result of his firm's lackluster share performance, Nardelli parachuted away with approximately US$210 million in severance.65
However, granted that some chief executives are overpaid, in light of simultaneously mismanaging their firms while getting handsome remuneration, not all of the complaints about CEO compensation stem just from these well-documented abuses. In addition, there is protracted debate centering around the sharp increase in average CEO pay that played out over several decades preceding the appearance of the financial crisis. Thus, the total real compensation for CEOs of large public companies rose 600 percent between 1980 and 2003,66 while median full-time earnings over the same time span only approximately doubled.67
On average, the CEOs of the largest companies pull down nearly five hundred times what rank-and-file employees make. Stated differently, that means the typical daily earnings of CEOs of big enterprises surpass many of their individual employees' annual salaries. And the way stock options are distributed reveal big swings, depending on one's level in the corporate hierarchy. In the typical firm three-quarters of them are allocated to CEOs.
Conventional Arguments Given by Economists: The Pay-for-Performance Paradigm
In the eyes of some boards, executives, and investors, such disparities may appear palatable insofar as their judgments are based on the pay-for-performance paradigm and the various arguments that flow from it. According to the pay-for-performance rationale, the focus should be on the economic value generated for the firm by an individual leader. Pay for performance can be viewed, on the one hand, as a reward for performance, or on the other hand, as an incentive to encourage performance. Some debate has arisen in the literature about whether and to what extent these seemingly alternative justifications—pay for performance versus performance for pay—are distinct, or not.68 At any rate, the underlying rationale for both is agency theory. The theory hold that agents, that is, managers and CEOs, should see it in their own interests to advance the interests of the principals, that is, the shareholders. Thus, if the agents are to be well compensated for superior performance the agents should be motivated to achieve that type of performance.
Competition
Competition for top management is a key pay-for-performance explanation. This position is advanced under several arguments. One argument asserts that, for publicly traded companies, a steady relationship exists in the market between total CEO compensation and the size of the firms they lead. The argument offers the so-called 30-percent rule as authority for this claim. For each 10 percent rise in the size of a company (calculated by sales, market value of assets, or other relevant indicia), CEO remuneration rises by approximately 3 percent. Since the correlation is alleged to have held constant since the 1930s, it is not thought to be the result of the steep escalation of stock options and other forms of compensation, which originated in the 1970s. And a seminal study found an average increase in CEO
