Wage Variance Acceptable And Ethical Inequality - 2370 Words

INTRODUCTION In the wakes of corporate scandals such as Enron and Lehman Brothers, executives’ compensations are being examined more than ever. Shareholders and general public want a guarantee that large executive pay packages are justified. Executive salaries have been a target for debates over the past several decades. At the heart of the discussions were the issues of fairness, equity, and market efficiency. There are some evident discrepancies between the executive compensations in the United States and in other countries. In 1990 the average salary of CEO was 110 times greater than the average worker s income in the United States. In comparison, the pay ratios in Japan and Germany were 17 and 23 times greater, respectively. The†¦show more content†¦The compensation was traditionally a method to align the goals of executives and stakeholders. Although in theory it would encourage desirable conduct, in real life we saw examples when executives took advantage of their governing position and participate in fraudulent activity to gain money at the expense of the shareholders. I will suggest the potential steps that could be made to prevent similar situation from happening and rebuild public between executive, shareholders, and stakeholders. Even though many CEOs have taken pay cuts in the recent years, their compensation packages are still enormous. Studies by BusinessWeek and other publications show that compensation for big company CEOs was more than 400 times the pay for average workers last year, up from a 42-to-1 ratio in 1980. If the minimum wage had gone up at the same rate, it would have been more than $22 an hour in 2006 instead of $5.15. There are many models to explain such a disparity. One of them is a â€Å"tournament model† according to which a substantial pay differential may exist to serve as an incentive for employees to work hard to climb the corporate ladder. Average employees expect that they can become a CEO and will make an extraordinarily large sum of money. Therefore they willingly accept wages lower than their marginal product in the early stages of their careers in exchange for the opportunity to receive a high pay in the future. The economic laws of supply and demand also