THE ROLE OF ETHICS IN EXECUTIVE-COMPENSATION - TOWARD A CONTRACTARIANINTERPRETATION OF THE NEOCLASSICAL THEORY OF MANAGERIAL RENUMERATION

The topic of Chief Executive Officer (CEO) compensation has been a foc us of interest for many years. The purpose of this article is to explo re the ethical dimensions of various generally accepted theories of CE O renumeration. We argue that a contractarian approach, based on the K antian ethical framework, can be used to augment the existing continge nt pay models. While the neoclassical economic model of the firm views the maximization of the shareholders' wealth as the sole responsibili ty of top management, a contractarian approach regards the balancing o f various stakeholders' interests as the primary task of top managemen t. Ethical problems emerge when there are divergent, yet equally justi fiable interests which compete in order to channel organizational reso urces to meet their own needs. In this situation, given the inherent a mbiguities and ever present possibilities of multiple perspectives, it may not always be feasible to provide a categorical answer to the que stion of whether the CEO's decisions are ethical. We suggest that a br oad interpretation of the neoclassical theory of the firm, one that is grounded in Kantian and contractarian ethics, can serve as a basis fo r a reconciliation of different theories of executive compensation.