FINANCE3 Unit VII: Executive Compensation and Its Ethical Concerns

This essay, prepared for FINANCE3 Unit VII, critically examines the issue of executive compensation. The author argues that current levels are unethical due to the widening gap between executives and regular workers, leading to income inequality and potentially increased risk-taking. The essay explores the impact of high pay ratios on worker productivity and proposes revisions to compensation structures, such as adjusting salaries based on geographic location and implementing merit-based increases. The role of government intervention, particularly in light of events like the Merrill Lynch and Bank of America merger, is discussed, alongside the relevance of the Sarbanes-Oxley Act of 2002. The author concludes that while executive compensation is distinct from typical pay packages, the recent increases in CEO pay compared to average workers raise significant ethical questions. This assignment provides a detailed financial analysis of executive compensation and its implications.

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Unit VII
By (Name)
Course
Instructor’s Name
Institutional Affiliation
The City and State
The Date

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Introduction
Executive compensation has continuously increased since the period of 1960s. According
to Economic Policy Institute, Executive compensation rose from 937 percent from 1978 to 2013
as related to 10 percent for other employees (Kuepper, 2018). For the last four decades, there has
been a financial problem. Currently, United States agencies started reporting about pay ratio data
and the issue is continuing to go down on companies that don’t share their wealth. Other
employees from United States firms have got to work for longer to catch up with their bosses at
work (Kuepper, 2018).
Yes, in my humble understanding the issue of Executive compensation at the current
level is unethical due to the following reasons;
The gap between the executives and the current workers becomes wide. This is in actual
sense termed as income inequality between the executives and average workers. As the
executives are able to acquire all their needs, the regular workers normally have less income to
fulfill their needs thus executive payment become unethical. Also, increased unnecessary risk-
taking may arise due to excessive executive compensation (Karabell, 2018). Even the
performance and productivity of firms which segregate between payments of the CEO and the
regular workers is in my view unacceptable. The high pay ratio forces workers to abandon or
insert less effort in performing their duties and thence output of the responsible firm tends to
decline rapidly (Karabell, 2018).
I would revise the compensation so that it is just by modifying the salaries basing on
employees’ geographic location. This could be done by increasing on the salaries of employees

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who live far from the work place compared to those who stay nearer. I would do this to cover up
the costs these employees incur in transportation, time wastage among others.
I would also use merit increase to reward top performers. The main aim here will be to
maintain and retain the star employees who are satisfactory to the company. This will keep these
employs and prevent them from leaving the company.
Yes, the government has got a role to play in executive compensation. In certain
incidences for example when Merrill Lynch was to merge with Bank of America, the United
States government stepped in to compensate the employees of the company where billions were
spent so as to protect the economy (Kuepper, 2018). However, since United States is a capitalist
economy, there is no need for the government to intervene in compensation at any one time
(Little, 2017).
The Sarbanes-Oxley Act of 2002 is just right. This is because company loans top
executives were banned, fraud was reduced and this has continuously given job protection to
workers (Amadeo, 2018). The act requires managers to control and manage their companies
internally. The act also protects employees since companies are prohibited from changing their
terms and conditions of employment (Amadeo,2018).
Conclusion
Executive compensation is not the same as typical pay packages. For executive
compensation, if the company doesn’t perform well, the executives will have to receive a smaller
percentage of their normal pay compared to when the company performs well. However, it
should be noted that the Chief Executive Officer pay has drastically increased in the recent
decades compared to the typical worker.

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References
Amadeo, K. 2018. Sarbanes Oxley Summary.
Retrievedfromhttps://www.thebalance.com/sarbanes-oxley-act-of-2002-3306254
Karabell,S. 2018. Executive Compensation is out of control. What now?
Retrievedfromhttps://www.forbes.com/sites/shelliekarabell/2018/02/14/executive-compensation-
is-out-of-control-what-now/#4a8c5406431f
Kuepper, J. 2018. Evaluating Executive Compensation.
Retrievedfromhttps://www.investopedia.com/articles/stocks/07/executive_compensation.asp
Little, K. 2017. Should the Government Cap Executive Compensation?
Retrievedfromhttps://www.thebalance.com/should-the-government-cap-executive-compensation-
3140723

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