$3.25 for every $1,000 increase in shareholder wealth.69 However, deeper questions arise: What do these correlations mean in a normative sense? Are the various pay-for-performance arrangements, alleged to be driven by competition, generous, or are they meager, and by what criteria might one decide? The standard discussions of this type of metric in the economics literature are characteristically devoid of moral reflection on such issues.
Talent
A second argument asserts that the biggest firms tend to draw the greatest management talent. Accordingly, the argument runs, larger companies need to compensate their CEOs more highly so as to provide a disincentive for them to abandon their firms and go lead smaller enterprises. What is notoriously absent from this line of argument, however, is any satisfactory notion of what “talent” actually means, beyond the bare threat of departure for greener pastures.
A closely related argument states that the rise in CEO pay is a product of the increase in market value of companies. The head of a more valuable enterprise is more productive because even if he ratchets up firm value by only a few percentage points, the increase in absolute value is greater the more valuable the company is. Assuming two managers with equivalent skill, one who directs a small hardware store and the other Xerox Corporation, the manager of Xerox is responsible for creating bigger value.70
It is worth pointing out that the disclosure of companies' executive compensation structures and levels requirements sometimes triggers invidious comparisons; boards and compensation committees, goaded by executives and remuneration consultants, approve escalating pay packages. After all, firms do not wish to be seen deficient compared to peers. Part of the ratcheting tends to be attributed to the aforementioned apprehension of a “flight of talent” to better paying firms, or migration to private equity, despite a dearth of empirical evidence of this. Yet one might ask: What exactly is meant by the “talent” of a corporate executive? Is there really a distinctive talent that can be moved so readily from firm to firm, as Toscanini was able to transport his stature as a maestro conductor from the New York Philharmonic over to the NBC Symphony?71 And how deeply rooted, how sincere, are the commitments of a leader to the firm under his charge, given that he is so easily lured away, simply by the one-dimensional enticement of a bigger pay package?
Efficiency
Finally it is argued that considerations of social efficiency dictate that the best managers should lead the biggest firms. Their heightened skills, it is claimed, exert a greater influence, owing to the fact that they are managing a greater share of capital, labor, and other resources. In other words, an efficient coupling of superior management with bigger firms in a competitive market for top-flight executives implies a positive correlation between enterprise size and total compensation awards.
Counterarguments and More Questions
As others point out, such explanations about the allocation of CEO pay often have less to do with real talent, proven performance, and actual contribution than with brute power, cronyism, and outright manipulation. Moreover, the competition argument is attacked on the ground that if increases in CEO compensation really did attract greater talent, then the resultant heightened competition for CEO positions ought to have softened any steep rise in compensation. However, no significant overall dampening in CEO pay has transpired. Hence, it is claimed that a more plausible explanation is that the bigger a firm's market value, the more likely it is that the CEO's pay can be hidden away, along with the compensation of other high-ranking executives, such that the big disparities are not noticed. Thus, CEO compensation gets increased whether he or she has contributed to enhancing the value of the larger enterprise.
Further questions arise: What levels of executive remuneration are proper? How ought such levels to be established by a firm's board of directors? What standards should guide the establishment of compensation levels? Is this something that the government should keep out of? Is it best to leave everything to the market to decide?
One of the most heated topics broached at the Pittsburgh G-20 summit was executive compensation. Many believe that exorbitant remuneration is inappropriate in cases where financial institutions have enjoyed bailouts with public revenue.72 Others contend that perverse incentive arrangements prompted financiers to assume inordinately high risks. From this they conclude that incentive structures ought to be reconfigured to reflect longer-term firm performance and broader social contributions. By contrast, some people would maintain on deontological grounds that over-the-top executive compensation is immoral per se, irrespective of the consequences they may or may not have brought about.
To sharpen our focus on this debate, let us bring Aristotle back into the discussion. By giving an account of the correct and fairest apportionment of labor, Aristotle connects reflections concerning the vertical array of human capabilities to the wider economic makeup of society, maintaining that those at the top of the natural pecking order ought to be occupied in undertakings so as to contribute the most to the economy and to society. From an Aristotelian standpoint, curtailing someone's chances to cultivate their skills in the name of equality contravenes justice. Even less justifiable is exalting those with little ability, making them leaders of society, or captains of enterprises, meanwhile keeping those of highest natural ability at the lowest strata. Aristotle's contention is that meritocracy provides the most just type of arrangement. All are better off from governance by the most proficient.
Firms need to make decisions about how they set compensation levels for all job functions. Assessing just what warrants merit is a matter of justice in distribution. However, as the following passage points out, those on contending sides of the issue are inclined to espouse positions in line with their personal interests. Within oligarchies, the governing elite pins merit to wealth. By contrast, in democracies the populace claims an equal entitlement to goods.
Let us begin by considering the common definitions of oligarchy and democracy, and what is justice oligarchical and democratical. For all men cling to justice of some kind, but their concepts are imperfect and they do not express the whole idea. For example, justice is thought by them to be, and is, equality, not, however, for all, but only for equals. And inequality is thought to be, and is, justice; neither is this for all, but only for unequals. When the persons are omitted, then men judge erroneously. The reason is that they are passing judgment on themselves, and most people are bad judges in their own case. And whereas justice implies a relation to persons as well as to things, and a just distribution, as I have already said in the Ethics, implies the same ratio between the persons and between the things, they agree about the equality of the things, but dispute about the equality of the persons, chiefly for the reason which I have just given—because they are bad judges in their own affairs; and secondly, because both the parties to the argument are speaking of a limited and partial justice, but imagine themselves to be speaking of absolute justice.73
Thus, to Aristotle each perspective carries a partial truth. Getting at the whole truth requires some philosophical reflection. Aristotle's conclusion is that merit is tied to traits that allow someone to perform a task in question. The problem of how to allocate instruments among flute players provides an illustration. Should we ask whether a flutist is rich or poor? Should we inquire whether the player is legally on par with the others? Aristotle's answer is no: what really counts is how well they can play the flute. The musicians that can play them well ought to get the best flutes. The players having less proficiency should get the inferior flutes.
When a number of flute-players are equal in their art, there is no reason why those of them who are better born should have better flutes given to them; for they will not play any better on the flute, and the superior instrument should be reserved for him who is the superior artist…. For if there were a superior flute-player who was far inferior in birth and beauty, although either of these may be a greater good than the art of flute-playing, and may excel flute-playing in a greater ratio than he excels the others in his art, still he ought to have the best flutes given to him, unless the advantages of wealth and
