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Distributive Justice and CEO Compensation

Author

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  • Jasso, Guillermina

    (New York University)

  • Meyersson Milgrom, Eva M.

    (Stanford University)

Abstract

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. The sample consists of students pursuing a Master 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 ideas of fairness in CEO compensation, including (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 level and dispersion in compensation across all CEOs. Our estimates yield the following main results: First, there is broad agreement on the median just CEO compensation but substantial inter-individual variation in the principles of microjustice and the other principles of macrojustice. Second, there is remarkable similarity in the distributions of the principles of microjustice and macrojustice across the MBA groups. Other important results include a pervasive gender attentiveness among MBA students and tolerance for large variability in CEO pay.

Suggested Citation

  • Jasso, Guillermina & Meyersson Milgrom, Eva M., 2007. "Distributive Justice and CEO Compensation," IZA Discussion Papers 3236, Institute of Labor Economics (IZA).
    • Handle: RePEc:iza:izadps:dp3236
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    References listed on IDEAS

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    1. Rosen, S., 1990. "Contracts and Market for Executives," University of Chicago - Economics Research Center 90-12, Chicago - Economics Research Center.
    2. Conyon, Martin J & Murphy, Kevin J, 2000. "The Prince and the Pauper? CEO Pay in the United States and United Kingdom," Economic Journal, Royal Economic Society, vol. 110(467), pages 640-671, November.
    3. George P. Baker & Brian J. Hall, 2004. "CEO Incentives and Firm Size," Journal of Labor Economics, University of Chicago Press, vol. 22(4), pages 767-798, October.
    4. Brian J. Hall & Jeffrey B. Liebman, 1998. "Are CEOs Really Paid Like Bureaucrats?," The Quarterly Journal of Economics, President and Fellows of Harvard College, vol. 113(3), pages 653-691.
    5. Jan Fidrmuc & Peter Huber, 2007. "Introduction," Empirica, Springer;Austrian Institute for Economic Research;Austrian Economic Association, vol. 34(4), pages 281-286, September.
    6. Thomas Piketty & Emmanuel Saez, 2006. "The Evolution of Top Incomes: A Historical and International Perspective," American Economic Review, American Economic Association, vol. 96(2), pages 200-205, May.
    7. Murphy, Kevin J., 1999. "Executive compensation," Handbook of Labor Economics, in: O. Ashenfelter & D. Card (ed.), Handbook of Labor Economics, edition 1, volume 3, chapter 38, pages 2485-2563, Elsevier.
    8. Arts, Wil & Hermkens, Piet & van Wijck, Peter, 1991. "Income and the idea of justice: principles, judgments, and their framing/s," Journal of Economic Psychology, Elsevier, vol. 12(1), pages 121-140, March.
    9. Roine, Jesper & Waldenstrom, Daniel, 2008. "The evolution of top incomes in an egalitarian society: Sweden, 1903-2004," Journal of Public Economics, Elsevier, vol. 92(1-2), pages 366-387, February.
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    Citations

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    Cited by:

    1. Carsten Sauer & Stefan Liebig & Katrin Auspurg & Thomas Hinz & Andy Donaubauer & Jürgen Schupp, 2009. "A Factorial Survey on the Justice of Earnings within the SOEP-Pretest 2008," SOEPpapers on Multidisciplinary Panel Data Research 238, DIW Berlin, The German Socio-Economic Panel (SOEP).
    2. Rüya Koçer & Herman Werfhorst, 2012. "Education systems and the formation of societal consensus on justice," Quality & Quantity: International Journal of Methodology, Springer, vol. 46(2), pages 451-470, February.
    3. Jasso, Guillermina, 2008. "Shall We Kill or Enslave Caesar? Analyzing the Caesar Model," IZA Discussion Papers 3460, Institute of Labor Economics (IZA).
    4. Edi Karni & Zvi Safra, 2008. "Moral sentiments and social choice," Social Choice and Welfare, Springer;The Society for Social Choice and Welfare, vol. 30(3), pages 427-446, April.
    5. Andreas Kuhn, 2010. "The Public Perception and Normative Valuation of Executive Compensation: An International Comparison," NRN working papers 2010-13, The Austrian Center for Labor Economics and the Analysis of the Welfare State, Johannes Kepler University Linz, Austria.
    6. Abraham, Martin, 2007. "Wann werden Löhne als gerecht eingeschätzt? : eine tauschtheoretische Betrachtung der Lohngerechtigkeit auf dem Arbeitsmarkt (When are wages evaluated as fair? : a look at wage fairness on the labor m," Zeitschrift für ArbeitsmarktForschung - Journal for Labour Market Research, Institut für Arbeitsmarkt- und Berufsforschung (IAB), Nürnberg [Institute for Employment Research, Nuremberg, Germany], vol. 40(1), pages 9-22.
    7. Edi Karni & Zvi Safra, 2003. "Moral Sentiments and Social Choice: Fairness Considerations in University Admissions," Economics Working Paper Archive 492, The Johns Hopkins University,Department of Economics.

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    More about this item

    Keywords

    Gini coefficient; inequality; MBA students; CEO compensation; factorial survey method; fairness; justice theory; gender; Atkinson measure; Theil’s inequality measures;
    All these keywords.

    JEL classification:

    • D31 - Microeconomics - - Distribution - - - Personal Income and Wealth Distribution
    • D6 - Microeconomics - - Welfare Economics
    • D8 - Microeconomics - - Information, Knowledge, and Uncertainty
    • G30 - Financial Economics - - Corporate Finance and Governance - - - General
    • I3 - Health, Education, and Welfare - - Welfare, Well-Being, and Poverty
    • J16 - Labor and Demographic Economics - - Demographic Economics - - - Economics of Gender; Non-labor Discrimination
    • J31 - Labor and Demographic Economics - - Wages, Compensation, and Labor Costs - - - Wage Level and Structure; Wage Differentials
    • J33 - Labor and Demographic Economics - - Wages, Compensation, and Labor Costs - - - Compensation Packages; Payment Methods
    • M14 - Business Administration and Business Economics; Marketing; Accounting; Personnel Economics - - Business Administration - - - Corporate Culture; Diversity; Social Responsibility
    • M52 - Business Administration and Business Economics; Marketing; Accounting; Personnel Economics - - Personnel Economics - - - Compensation and Compensation Methods and Their Effects

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