Advisor

Oppenheimer, Henry [faculty advisor, College of Business Administration]

Date

5-2008

Keywords

compensation, ethics, CEO, corporations, business

Abstract

Corporate ethics and chief executive officer (CEO) compensation will be forever linked together. The dramatic increase in recent corporate scandals has driven increased scrutiny of the enormous executive salaries that CEOs collect each year. The connection between these two topics led me to explore how executive compensation plans are designed and how ethics affect executives’ decision making. In this paper I try to determine which financial factors are the best indicators of a CEO’s compensation. I also examine how profitable a company is with an ethical CEO compared to a company with an unethical CEO. The companies I use are the ones in the S&P 500, S&P 400 (mid-cap), and the S&P 600 (small-cap). The factors that I use to observe a CEO’s compensation are five year returns, percent growth rate in net income, percent change in revenue, and average gross profit margin. Other factors that were included are CEO tenure and the market capitalization of a company (total dollar market value of all of a company’s outstanding shares). To examine ethical CEOs against unethical CEOs, I devise an equation that consists of five different ethic components (employees, community, governance, environment, and product). Each company I examined was awarded 0-10 points based on how ethical that CEO and company were for that component. Companies scoring above a 70% were seen as ethical, and the ones scoring below 70% were seen as unethical. The ethical and unethical companies were then compared and evaluated. Then I plug the ethical score result into a final regression equation to see how and if ethics play a role in a CEO’s compensation.