Increasing inequality is a serious challenge to social cohesion and stability (UNDESA, 2020). One of the most blatant examples for this is the considerable increase of executive compensation over the last decades. Since executive compensation as emerged at the beginning of the 20th century public controversy has haunted CEO salaries. Criticism mostly cites that it is too high or unfair – but when is it too high and when is it unfair? For anchoring the public sentiment in a more tangible and refined manner one can draw on the insights from economics, economic history, and philosophy. Together they provide three principles that can be ordered in a model of justification to guide the evaluation of executive compensation. Following these principles, it seems unlikely that current levels of pay are justifiable.

Evidence for practice

• Inequalities are inevitable and even necessary, but they should be seriously questioned given their implications for social cohesion;
• Equality of opportunity, an efficient principal-agent relationship and a fair distribution of social benefits are key to justifying executive compensation;
• Institutional settings that prevent back-door deals and nepotism and allow serious supervision by the affected parties when setting executive pay should be fostered.

Keywords: equality, executive compensation, incentives

Citation: Magin, J. (2021). Incentives and Inequality: A search for principles guiding executive compensation. Public Note, URS

magin_2021_.pdf
File Size:	562 kb
File Type:	pdf

Download File

---

Jesse Magin

"My name is Jesse Magin and I am a bachelor student at Utrecht University. I am studying Philosophy, Politics and Economics with a focus on markets and regulators. Since I am very much interested in economic structures and the financial system in particular, what has always struck me were the fact that some executives were paid incredibly large salaries during the financial crisis in 2008 despite their rather subpar performance. Starting from this puzzling observation I arrived at the overarching question of why one would pay certain people a couple of hundred times more than the average worker in the first place. Crucially, it appears important to me to overcome the initial outrage about large compensation packages and ask how these can actually be justified and to what extent these justifications match up to reality."