Rewarding social responsibility at the top Essay example

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Occasional Paper
OP-153
June, 2008

PROS AND CONS OF REWARDING
SOCIAL RESPONSIBILITY AT THE TOP

Pascual Berrone

IESE Occasional Papers seek to present topics of general interest to a wide audience.

IESE Business School – University of Navarra
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Copyright © 2008 IESE Business School.
IESE Business School-University of Navarra - 1

PROS AND CONS OF REWARDING
SOCIAL RESPONSIBILITY AT THE TOP
Pascual Berrone1

Abstract
Overemphasis on financial performance of incentive systems has been blamed as the principal culprit for recent corporate scandals. In response, some scholars and experts have suggested including social performance criteria in top executive pay packages. To date, however, very little is known about the true benefits of this practice. This article critically discusses the implications of including these types of criteria in compensation schemes.

1

Professor, Strategic Management, IESE

Keywords: social performance criteria, incentive systems, executive compensation.
IESE Business School-University of Navarra

PROS AND CONS OF REWARDING
SOCIAL RESPONSIBILITY AT THE TOP

Introduction
Every year, leading newspapers and business magazines compete to see who can appear most outraged about how much the top corporate chief executive officers (CEOs) were paid during the previous year. Thus, headlines like “Despite Poor Performance, CEOs Get Paid More Than
Ever,” “The Great Pay Heist” or the provocative “It Paid to Cheat” are not uncommon in the business press.
In 2007, the CEO of a Standard & Poor’s 500 company received, on average, $14.2 million in total compensation with outliers such as Yahoo’s CEO Terry Semel, who received $71.7 million in pay, stock options and other forms of compensation. Together, CEOs of these companies received a combined total over $7 billion.
But the problem is not only that compensation for top executives has grown at an unprecedented rate in the past two decades but also that inequality is on the rise. The gap between the pay company’s chief executive and that of one of their rank-and-file employees has widened. According to existing estimations, CEOs are paid between 250 and 500 times that of the average worker. Not surprisingly, John Mackey, the CEO of Whole Foods, receives positive press for his pay policy, which caps the chief executive’s salary and bonus at 14 times
(only!) the average worker’s pay. The Wall Street Journal, Slate.com, Harvard Business Review and BusinessWeek have all mentioned the pay cap, generally in favorable terms.
In addition to the stratospheric pay hikes and inequalities issues, there are other aspects that outrage public opinion, such us unusual perks (including airplanes, health club memberships, dinners in five-star restaurants, and the like), golden parachutes for ousted CEOs (which seem to reward failure), and huge sign-on packages of their replacements, all of which have also aided in boosting median CEO pay and raising benchmarks for future pay packages.
Many have blamed incentive schemes as the sole culprit for undesired corporate behaviors such as fraudulent financial reporting, corruption, tax evasion, exploitation of underage workers and other forms of opportunism, malfeasance and white-collar crime. Computer Associates, Qwest
Communications Intl., or Tyco International are just a few egregious examples. Unfortunately, this happens everywhere, not only in US companies. Renowned cases in other countries include
Parmalat, Elf, and ABB in Europe, and the most recent case in Asia, the indictment of South
IESE Business School-University of Navarra

Korean Samsung Chairman Lee Kun-Hee for tax evasion and breach of trust. However, despite the cry for reform following the corporate scandals of recent years, CEO compensation continues to
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