Corporate Executive Salaries – The Argument from Economic Efficiency

Abstract

The very high level and constant growth in salaries for corporate executives has been a trend causing debate for over a decade now. It has given rise to a range of arguments for and against high salary levels. The single most prevalent argument for high executive salaries has been the argument based on economic efficiency. In this argument, high salaries for corporate executives are justified as they form an incentive that motivates them to high performance. While striving to earn these incentives, executives achieve improvements to productivity in their firm, which benefits society. This paper considers the argument from economic efficiency from a philosophical viewpoint. Arguments for and against this justification are examined for consistency with philosophical (distributive justice) and economic theory to test their logical soundness. Empirical evidence from Australian and United States salary markets is also examined where relevant to conclude on the validity of the arguments. Most arguments for high executive pay are shown to be unsound in that they assume cause and effect by linking the executive’s actions to the corporation’s performance. Philosophically, the efficiency argument may be valid, provided empirical evidence confirms that high executive pay leads to improved societal wellbeing. However on the evidence of most studies that is not empirically true for executives in Australia and the United States.