Exorbitant Execs – Is it ethical for executives to pay themselves stratospheric salaries?

Q. Is it ethical for top executives to be getting the kind of obscene salaries which have become commonplace?

A. There are certain ethical problems with executive salaries, as we will discuss. But we should clarify that Jewish tradition definitely does not validate begrudging these individuals their lavish salaries. This kind of attitude is foreign to our tradition; the Mishnah states that a “benevolent eye” is one of the three primary characteristics that should characterize the followers of our father Abraham.(1)

And the book of Proverbs (3:27) states, “Don’t deny a benefit from one to whom it is due.” The Talmud says that this admonition applies to an overly zealous agent who saves the employer’s money by scrimping on workers’ salary when he is fully authorized to pay them more. (2) This should teach us that if shareholders are satisfied enough with performance to pay executives generous amounts, then it is inappropriate to object on the grounds that the sums may be immodest.

The real question is not if executive salaries are outrageous per se, but rather whether they are fair compensation for the services provided. There is no question that some highly gifted individuals contribute tremendously to company value. News of the arrival or departure of a new CEO is often accompanied by stock movements indicating that individual’s contribution as being worth hundreds of millions of dollars. In other words, we should keep in mind that there may be reasonable justification for high salaries, and the shareholders may not object to paying them.

At the same time, there are many very troubling aspects about these saturnalian salaries. The two main ethical issues involved are consent and equity. Do the shareholders genuinely consent to these salary programs, or are they the result of management’s power to evade and deceive them? And is it equitable for a few employees to be earning tens of millions of dollars when the average employee is struggling to make ends meet?

The consent issue arises because company management often sets its own pay scales. While technically it is the board of directors who are responsible for setting the salaries of top executives, directors often defer to those decisions to the executives themselves (because of time constraints or because of their dependence on management).

This situation creates an obvious conflict of interest. As a loyal employee, the manager is responsible for keeping salaries at a reasonable level. But the manager’s personal interest is to obtain a very high salary. There doesn’t seem to be a very effective firewall between these two functions. In a great many cases, it’s pretty hard to believe that managers would agree to pay other, comparatively qualified candidates the same extravagant amounts they pay themselves.

Sometimes managers add insult to injury by taking time away from their managerial responsibilities in order to craft increasingly lucrative and underhanded compensation schemes for themselves. A compensation package cannot be ethical if it lacks adequate transparency.

Jewish law states that if an agent exceeds his authority and offers to pay workers more than the going rate, the employer is not obligated to pay the inflated salary, and the agent himself must bear the loss.(3) The application to executive salaries is clear. Since managers are the agents of the stockholders, they may pay themselves only a salary that is commensurate with their level of ability. Any salary agreement beyond this is excessive.

The equity issue arises because the manager is also a worker, and an equitable policy toward workers means that there should be some kind of rationality in relative pay scales. While a gifted manager does add immense value to the firm, he or she doesn’t add value alone. This value is created by workers at every level. It’s true that market value is greatly influenced by turnover in top management, but it is likely that massive turnover of lower-level workers would have an even greater impact on value. Executive pay scales need to reflect the manager’s contribution, but the same criterion applies to other employees as well! Many prominent executive pay schemes defy every reasonable measure of such rationality.

We can benefit from the example of the Garmu family, which had a unique secret for making the showbread in the Holy Temple. The Talmud tells us that they were able to negotiate a very high pay level for themselves due to their special knowledge; we see that our tradition does not condemn tenacious negotiations to realize our full value. Yet despite their lavish salary, family members never ate white bread, so that they should never be suspected of taking unjustified benefit from their position.(4)

It is ethical for managers to get a competitive return for their unique talents. However, when they have a say in their own compensation, they are obligated to evaluate impartially the value they bring to the company, just as they would evaluate salary offers for hiring some other individual with a similar background.

(1) Mishnah – Avot 5:19
(2) Babylonian Talmud – Bava Metzia 76a
(3) Shulchan Aruch – Choshen Mishpat 333
(4) Babylonian Talmud – Yoma 38a