One for A, Two for B, and Four Hundred for C: The Widening Gap in Pay Between Executives and Rank and File Employees

This Article, focuses on executive pay in relation to that of rank and file workers. It examines the standard justifications for the vast and increasing pay gap between executives (particularly CEOs) and rank and file workers and finds that such arguments do little more than attempt to justify in economic terms a situation that exists for a very different reason. Instead, the author argues, the real reason such a huge and widening gap in pay between executive and rank and file workers exists is market failure in the mechanisms of setting executive pay, aggravated by the shareholder primacy norm, which has resulted in an explosion in the use of incentive pay to compensate executives.

The Article discusses two reasons why such a pay gap should be viewed negatively. The first is an economic argument that rests on declines in productivity and other adverse motivational consequences of employees’ perceptions of unfairness. More importantly, the author argues that vast pay disparities are unacceptable as a matter of social policy and our notions of distributive justice. In order to address these concerns, the Article puts forth some suggestions for obtaining a more reasonable relationship between the compensation paid to executives and the pay received by rank and file employees. Finding it impractical to identify and attempt to achieve a particular pay ratio, the author argues for an approach that attempts to introduce more fairness (and perception of fairness) into the compensation setting process.