Distributive Justice and CEO Compensation

This paper develops a framework for studying individuals’ ideas about what constitutes just compensation for chief executive officers (CEOs) and reports estimates of just CEO pay and the principles guiding ideas of justice among students pursuing a Master’s of Business Administration (MBA) degree in Sweden and the United States. The framework, based on justice theory and making use of Rossi’s factorial survey method, enables assessment of three main sets of quantities: (1) the just CEO compensation, in the eyes of each observer; (2) the principles of microjustice – observers’ ideas about “who should get what” based on characteristics of CEOs and their firms; and (3) principles of macrojustice – ideas about the just variability in compensation across all CEOs. Discerning ideas of justice about CEO compensation is important because substantial gaps between actual CEO pay and what people regard as just CEO pay generate judgments of injustice, setting in motion a train of negative consequences for economy and society. In the first application of the framework, reported here, we target one pivotal segment of the population – MBA students – in two countries, Sweden and the United States, generating three samples, Swedish male MBA students, Swedish female MBA students, and U.S. male MBA students. Our main findings are: First, there is substantial interindividual variation in the principles of justice. Second, there is remarkable similarity in the distributions of the principles of justice across the three samples, suggesting the existence of a global business culture which, consistent with ideals of risk, innovation, and individualism, accommodates wide individual differences. Third, estimates of the principles of microjustice provide a variety of useful and suggestive results, such as higher just rate of return to schooling in the eyes of Swedish men (8-9%) than in the other two samples (5-6%) and a median elasticity of just CEO compensation with respect to firm capitalization in the range of .14-.26%; further, the median respondents regard as just an amount of pay for women CEOs that is 84% to 94% that of otherwise identical male CEOs. Fourth, estimates of the principles of macrojustice indicate that the MBA students regard as just rather high levels of inequality in CEO compensation (e.g., median Gini index values of .76-.78), possibly dulling the senses to economic inequality in the larger population, where a Gini of .50 would be considered too high by most observers.