CASE INCIDENT 1 It's Not Fair! Few topics in the business press have grabbed more reward success and not simply status." Cooper believes all headlines recently than highly lucrative annual bonuses for employees should share the company's good fortune in top management. Critics bemoan the multimillion dollar profitable periods. He has recommended that CEO com- compensation packages offered in the financial services pensation be capped at 20 times the salary of the lowest- industry in particular, following the dire consequences of paid employee. In fact, the average S&P 500 CEO is paid the meltdown of this sector a few short years ago. 263 times what the lowest-paid laborer makes. This is eight How is executive compensation determined by times more than the ratio from the 1950s, which might compensation committees? Some researchers suggest that serve as another reference point for determining what is principles from equity theory (making comparisons to ref- considered "fair." erent others) might explain variations in executive pay. To set what is considered a "fair" level of pay for top executives, Questions members of the board find out how much executives with 1. How does the executive compensation issue relate similar levels of experience in similar firms (similar inputs) to equity theory? Who do you think should be the are being paid and attempt to adjust compensation (out- referent others in these equity judgments? What are comes) to be equitable. In other words, top executives in the relevant inputs for top executives? large oil firms are paid similarly to top executives in other large oil firms, top executives in small hospitals are paid 2. Can you think of procedural justice implications similarly to top executives in other small hospitals. In many related to the ways pay policies for top executives cases, simply changing the referent others can change the have been instituted? Do these pay-making decisions salary range considered acceptable. According to one view follow the procedural justice principles outlined in of justice theory, this should be perceived as equitable, the chapter? although executives may encourage boards to consider spe- 3. Do you think the government has a legitimate role cific referent others who are especially well-paid. in controlling executive compensation? How might Critics of executive compensation change the debate we use distributive and procedural justice theories to by focusing on the ratio of executive compensation to inform this debate? that of the company's lowest-paid employees. Researcher 4. Are there any positive motivational consequences of Cary Cooper notes, "In business, it is important to tying compensation pay closely to firm performance