Ethics of executive compensation

Seminar paper from the year 2010 in the subject Business economics - Investment and Finance, University of Applied Sciences Essen, language: English, abstract: In 2009, a year which was highly influenced by the financial crisis, Josef Ackermann earned 9.55 million Euros. The CEO of Deutsche Bank AG already got 30% of his salary paid out. He will receive the rest in the following years. On average a CEO of a company listed in the DAX 30 stock index received yearly payments of 3.64 million Euros (plus retirement provisions) in 2009 which is about eight times more than a division director's payments and twenty times more than a department manager's payments. Are these enormous executive compensations ethical? This is the question going to be answered by having a look at typical components of executive compensation and their current development. Four theories will be introduced which seem to be appropriate for answering the question at first view. It will be checked weather these theories are helpful for an ethical evaluation of the predominant compensation systems. The focus will lie on CEOs of German companies listed at the stock exchange with a wide spread ownership structure like e.g. Deutsche Bank AG. The reason is that these companies do not have one dominant owner who can fix the executive compensations but have a multitude of owners who are interested in an efficient and ethical compensation system. Afterwards the best suitable theories will be applied to the ethical question. Ethical executive compensations are not mentioned in the company's ethical codes. Instead the design of executive compensation is influenced by the new institutional economics. According to the property rights theory and the principal-agent theory the compensation should be performance-related as the relationship between the shareholders and the management is a principal-agent relationship facing information asymmetries which have to be minimized by regulations of the employment contract.