Executive Salaries

The issues

Much media attention has been given lately to the topic of executive salaries. The problem is that, in recent years, the compensation of top executives has soared to many times the level of a generation ago, yet there seems to be little evidence that high-ranking managers today are any more competent than those of the previous generation. Surveys of executive compensation such as those of Fortune magazine indicate that CEOs (chief executive officers) of leading US companies were paid about four times as much in 2002 as in 1980.

Now the trend towards higher pay has crossed the Atlantic, and British and European companies are also starting to offer American-style compensation packages. This process is illustrated by the recent case of Glaxo, in which a significant proportion of shareholders opposed a generous executive compensation package.

The Jewish Perspective

This is an extremely complex issue, and the ethical insights from Jewish tradition relate to a number of aspects.

"DON'T DENY A BENEFIT"

One thing that Jewish tradition definitely does not validate is to begrudge these individuals their substantial salaries. This kind of attitude is foreign to our tradition; the Mishna states that a "benevolent eye" is one of the three primary characteristics which should characterize the followers of our father Abraham. (Avot 5:19.) And the book of Proverbs states, "Don't deny a benefit to whom it is due" (3:27). The Talmud says that this admonition applies to an overly-loyal agent who saves the employer's money by scrimping on workers' salaries, when he is fully authorized to pay them more. (Bava Metzia 76a.) This should teach us that if the shareholders are perfectly willing to pay their executives generous amounts, it is inappropriate for anyone else to object that the sums themselves are excessive.

Many examples from our history can show us that tenacious negotiation for generous pay is acceptable. The Talmud tells us of the Garmu family who had a secret method for making the show-bread in the Temple. The sages administering the Temple tried to replace them with foreign artisans, but when it became clear that their bread was not as perfect as that of the house of Garmu, the family was hired back - but only after they insisted on receiving double their original pay!

There is an interesting story about the great Hasidic master Rav Simcha Bunim of Peshischa (Przysucha), who for many years supported himself as a trader in lumber. The story relates that one time he was looking for business in Warsaw and was down to his last penny, when he received an offer to work as a clerk in the business empire of the renowned businesswoman Tamarel of Warsaw. Despite his straitened circumstances, Rav Simcha Bunim refused to work as a clerk or even as a manager and agreed to the job only if he was taken on as a partner in the deal. (The story relates that his somewhat audacious demands were accepted by Tamarel, who was known as a great supporter of Torah scholars and also was well aware of Rav Simcha Bunim's outstanding abilities.)

The real question is not whether executive salaries are thought to be excessive 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 a firm's value. News of the arrival or departure of a new chief executive officer is often accompanied by share price movements indicating that investors assess that individual's contribution as being worth many millions of pounds.

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. One is reminded of the large increase a generation ago in the salaries of professional athletes. At first, the public was offended by the idea of sports stars earning salaries of millions of pounds, but eventually took the view that they, after all, are the ones who are creating value in the sports business and they deserve a fair return for their unique talents.

CONSENT AND EQUITY

At the same time, there are many very troubling aspects about these very large salaries. The two main ethical issues involved consent and equity. Do the shareholders genuinely consent to these salary programs, or are they the result of management's power to dissemble and take advantage of their position? And is it equitable for a few employees to be earning so much more than the average employee, some of whom may be struggling to make ends meet?

The consent issue arises because the management of the company in effect 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 the decisions of the executives themselves. Outside directors don't always have the time and the knowledge to make informed decisions about salaries, unlike the managers who are intimately familiar with the workings of the company. There are also instances of 'reciprocal directorships' where an executive will be a non-executive director of a company, the CEO of which sits on the board of the first executive. An additional problem is that in some countries directors themselves are partially subordinate to the management, especially in the US where the chairman of the board of the largest companies is often also the highest manager.

These situations create obvious conflicts of interest. As a loyal employee or director, an individual is responsible for keeping salaries at a reasonable level but their personal interest may well be to obtain a very high salary for themselves. There often does not seem, in practice, to be a very effective firewall between these two functions. In many cases it is questionable whether managers would agree to pay other comparatively qualified candidates the same amounts they are prepared to pay themselves.

There are often substantial benefits, such as pension contributions or share options and bonuses, in addition to very large salaries. A compensation package can not be ethical if it lacks adequate transparency.

The halacha 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 must bear the loss. (Shulchan Arukh Choshen Mishpat 333.) This would suggest that since the directors and managers are there, amongst other things, to protect the interests of the shareholders, they are authorized to pay only reasonable salaries in keeping with open market terms. Any salary agreement beyond this is excessive.

The equity issue arises because the manager too is a worker, and an equitable policy towards workers means that there should be some kind of rationality in relative pay scales. A gifted manager does add immense value to the firm, but he or she does not do so alone. Situations, which cause resentment or envy in the community, are not encouraged by Jewish values.

PERSONAL EXAMPLE IN CORPORATE LEADERSHIP

In the previous section, we asked if the owners really consider the managers worth their salaries, and then asked if these salaries are equitable. Ultimately, these two considerations are intimately interwoven. Nowadays, it is universally accepted that the essence of good management is effective leadership; and it can well be argued that the essence of leadership is personal example. In order to inspire workers to be loyal to the company and be willing to see their compensation in terms of what is fair recompense for what they contribute and create, the highest echelon of management must be prepared for their renumeration to be put to the same test. Otherwise, they risk setting an example of self-serving exploitation which will inevitably infect the entire organization.

An example of effective leadership by personal example is illustrated by the behaviour of Moshe when Korach challenged his leadership. Moshe, in combating Korach, could have pointed to his many achievements as a leader: his remarkable negotiations with Pharaoh, his impressive military victories, his unapproachable spiritual leadership. Instead he focused on one element: his moral rectitude: "And Moshe was very angry, and said to HaShem, 'Don't accept their offering, for I have not taken a single ass from them'" (Numbers 16:15). Moshe, as the leader, would have been entitled to appropriate rewards but he was an effective leader because he set a personal example for ethical behavior. A company executive officer will likewise be effective if he, or she, sets the tone by accepting compensation seen to be justified and reasonable.

Another excellent example is that of the Garmu family referred to earlier. The Talmud also tells us that despite the substantial salary they received for making the show-bread in the Temple, family members never ate white bread, so that they should never be suspected of taking unjustified benefit from their position. The same passage tells of the Avtinas family, who had a trade secret for making the incense. Even brides from this family never wore perfume, so that they should be above all suspicion of taking advantage of their position.

The intuitive and correct course of action according to Jewish law is clear. Managers in their role as the arbiters of salaries should impartially evaluate the appropriate pay scale for the talents they themselves bring to the company, just as they would evaluate salary offers for hiring some other individual with a similar background. The manager has to be able to look in the mirror and give an honest, objective and fair answer to the question, what is the fair remuneration for the person staring at me from the glass?