Human Values and Corporate Social Impact: Fairness in Pay Ratios

Editor's Note: This is the fourth post in a six-part series examining the Supreme Court’s 2010 “Citizens United” decision that affirmed the legality of treating corporations as persons. Using JPMorgan Chase as an example, Donald J. Munro of the University of Michigan focuses on how certain human moral values and some corporate behaviors are incompatible. You can follow the whole series here. 

By Donald J. Munro

Fairness is associated with equality in the distribution of goods, often referred to as “distributive justice.” It derives from the practice of equal sharing, seen in children starting around age 7 or 8.

Among children, fairness is often tied to empathy, and can be found in parental rules that are designed to prevent another child from feeling unhappy. It is also related to reciprocity, meaning fairness in exchanges of valuable goods. Cooperation in groups thrives where there is reciprocity, as James Q. Wilson has discussed.

Culture determines the varying boundaries of what constitutes “equal shares.” And who is “equal” in status. In our own society, popular opinion may accept a certain unequal ratio between CEO pay and the average pay of other workers, but not beyond a given point. That is when executive pay becomes a political topic on which shareholders may have an “advisory role,” and very often have opinions contrary to those of the board of directors. In the 1970s, management specialist Peter Drucker advised companies to stick to a ratio of 20-to-1 between CEOs and average worker pay, to avoid resentment.

At the unconscious level, our judgments of what is fair may be biased, reflecting the views of a group to which we belong, especially in conflicts with other groups. This is often the case when an authoritative leader within the group expresses the bias and through persuasion or coercion gets others to follow. Absent that situation, the danger of bias can be lessened to the degree that there are facts to discuss. For example, let us now turn to the facts in the case of JPMorgan Chase:

Summary of executive pay at JPMorgan Chase for 2012

“On Jan. 16, 2013, the board of JPMorgan announced that CEO Jamie Dimon’s bonus for 2012 would be cut in half, citing the company’s $6.2 billion 'London Whale' trading loss … Despite the board’s decision to cut Jamie Dimon’s bonus for 2012, there are concerns related to the company’s executive compensation practices. Most notably, annual incentive compensation at JPMorgan continues to be paid at the discretion of the Compensation and Management Committee, so that each of the named executive officers (NEOs) received annual bonuses of at least $2.9 million to $4.5 million. Discretionary incentive awards undermine the integrity of pay-for-performance compensation philosophy," analysts at GMIRatings wrote.

Executive pay for 2012:

James L. Dimon, Chairman of the Board and CEO: $18, 717,013

Daniel E. Pinto, Co-Chief Executive Officer: $17, 009, 797

Matthew E. Zames, Chief Operating Officer: $16, 604,301

Ratio of executive pay to pay of other workers for 2012:

JPMorgan Chase pay ratio: 229-to-1; CEO pay and benefits: $18.7 million FY ended 2012

JPMorgan Chase average worker pay and benefits: $81,772, FY ended 2012.

How much richer than you and me is the average chief executive?

Back in 2013, Lydia DePillis of the Washington Post examined the Economic Policy Institute's latest white paper, which "tracks the growth of CEO compensation over the last half century." Here are the major takeaways, as reported by DePillis in the Washington Post:

• "Average pay for the CEOs of the top 350 firms, including the stock options they exercised, was $14.1 million in 2012 -- up 37.4 percent from 2009.


• That's a bit higher than it would be if you just measured stock options granted. "Firms apparently pared back the value of new options granted because CEOs fared so well by cashing in options as stock prices grew," the report's authors write.


• The ratio of CEO pay to average worker pay is 273-to-1, down from a high of 383-to-1 in 2000, but up from 20-to-1 in 1965.


• CEO pay has increased faster than wages to high-skilled workers, suggesting that the salary market isn't very efficient. "Consequently, if CEOs earned less or were taxed more, there would be no adverse impact on output or employment," the report concludes.


• CEO pay is now also closely tracking the S&P 500 index, which didn't used to be the case."

Next: Trust and integrity

Image credit: Flickr/jurvetson

Donald J. Munro is professor emeritus of philosophy and Chinese at the University of Michigan. Munro connects venerable philosophical traditions to modern scientific discoveries, always with a concern for the ethics of human action. His books include The Concept of Man in Contemporary China, Images of Human Nature: A Song Portrait, and Individualism and Holism: Studies in Confucian and Taoist Values. In recent years he has been the Ch’ien Mu Lecturer in Chinese History and Culture (2006) and the Tang Junyi Visiting Professor (2009) at the Chinese University of Hong Kong. He is a founding member of the Interfaith Partnership for political Action (ippa.us).