Question

What role does corporate level performance compensation based on profits and stock price have in the ethics associated with risk taking?

needs to be around 150 words

Answer 1

It is well known that growth in the executive compensation beats average wage growth for employees. By a wide margin. Outperformance leads to ever more pronounced levels of disparity of wages. Despite public anger and media scrutiny, subjective peer group referents and benchmarking, coupled with ineffective regulatory instruments, account for much of this trend. Excessively high executive pay associated with corporate targets leads to excessive risk-taking and increased likelihood of unethical, potentially illegal behaviour. The application of deontological ethics and the concept of fiduciary duty asserts that the current structure and executive compensation levels are indeed, unjustified.

Contemporary executive compensation packages generally include a combination of basic salary , bonuses, stock restrictions, stock options, perquisites and long-term incentive plans. Bonuses, stock options, and limited stock feature, aim to combine management preferences with shareholders. These compensation characteristics act as incentives for executives to engage in potentially risky, profit-maximizing activities that benefit shareholders when successful ventures. Since managers can not diversify risk across companies, it requires a sufficiently high level of these forms of compensation to attract talented candidates.

Performance metrics derived from operational measures increase the executive pressure to take action to optimize short-term productivity which may be antithetical to long-term survival and growth. While not directly related to compensation, excessive greed for short-term shareholder capital may have been an underlying factor behind the GFC More specifically, stock options as a large proportion of executive compensation may lead to unnecessary risk-taking and unethical behaviour. Inevitably, this is detracting from other stakeholders' wellbeing.