CEO COMPENSATION AND ETHICAL DECISIONS 1
Chief Executive Officer’s Compensation
and Their Ethical Decisions
Greg Olson
Athens State University
CEO COMPENSATION AND ETHICAL DECISIONS 2
Abstract
This paper main focus is on CEO compensation and their Ethical Decisions. Over the past 20 to
30 years there has been a hard debate about the sudden rise in CEO pay and they decide to accept
this pay-setting process. Most of us would view the high level of CEO compensation as the
direct result of very powerful managers setting their own pay. Others would interpret the high
pay as the result of optimal contracting in a competitive market for managerial talent. I will try to
describe and discuss the actual facts of CEO pay and their decision to accept large sums of
bonuses even when their company is facing bankruptcy or default on loans. My review suggests
that both top managerial power and very competitive market forces are important determinants
of CEO pay, but that neither approach is ethical when shown the true evidence.
Keywords: Chief Executive Officer, Ethical Decisions
CEO COMPENSATION AND ETHICAL DECISIONS 3
Chief Executive Officer’s Compensation
and Their Ethical Decisions
In the corporate world of CEO’s ethics and pay compensation has become an issue for a
very long time and there seems to be no end. What CEO’s don’t understand is the affect it might
have on the future of their company and employees.
Let’s first take a look of what CEO compensation is. A CEO compensation comes from a
variety of sources. Salaries. This is the meat of their earnings and base salaries can be well over
$1 million. Unfortunately, they still receive the same salary when the company does badly.
Bonuses. This can vary due to performance of the CEO. What I mean by performance is that
profits and revenue growth, plus return on equity or price appreciation all determine what a CEO
will get in bonus compensation. Additionally, in most cases annual bonuses is nothing more than
a base salary in disguise. Most importantly to bonuses is that the board of directors measures the
CEO’s effectiveness and then uses that measurement to determine the CEO’s bonus. Lastly, stock
options. First are the stock options of a company. Companies link executives financial interest
with shareholders’ interests. So when shares go up in value, executives can make a real fortune.
But when shares go down in value, the executives are no worse off than before. Second is stock
ownership. This is where it is the most important performance driver. So this is where the
