A Nissan executive awaiting trial escaped house arrest, fleeing Japan for Lebanon, The Washington Post reported. Carlos Ghosn was taken into custody in 2018 and released on house arrest. His alleged crimes evoke questions of executive pay and business ethics.
Ghosn’s flight from justice has raised more concerns of business ethics in Japan than it initially seemed. According to the article in The Washington Post, Ghosn’s crimes include “underreporting his income and enriching himself through payments to dealerships in the Middle East.” Ghosn allegedly decided to flee Japan because he believed that foreigners in Japan were less likely to receive fair trials than lifelong residents. Ghosn was also known for his high salary and “lavish lifestyle,” which, when combined with his alleged financial misconduct, raised questions about executive pay and who should decide fair compensation for top-tier employees.
How Much Is Enough?
“One way to assess the situation regarding executive pay is to construct a ratio of CEO pay to that of the average corporate employee,” said Professor George S. Geis, William S. Potter Professor of Law at the University of Virginia School of Law. “For example, if the CEO earns $1 million at Firm X, while the average worker earns just $50,000, then the compensation ratio is 20x—or it’s 20 times as great.”
Professor Geis said that an academic study measured CEO pay rates using this ratio over a 50-year period in the United States. In 1965, the ratio of CEO compensation to average employee pay was about 20x, or 20 times as much. In 1990, the ratio rose to 60x; by 2000, it was over 380x. This means CEOs earned more than 380 times the salary of their average employee.
If you pause to consider that the highest-level earner at your company makes more in one day as you do all year, you’ll likely find yourself facing a common dilemma of ethics, politics, and law.
“Is it legally ‘wrong’ for a CEO to earn 300 times as much as the average worker?” Professor Geis asked. “Executive compensation has proven to be a very difficult area for corporate law to tackle. There is no magic number that a judge can latch on to as a trigger for an excessive paycheck.”
Accountability of a CEO
Executive pay is a topic usually reserved for boardrooms, but it entered the spotlight most famously after the housing market collapse in 2008, when it turned out that consumers weren’t the only ones worried about top earners at companies.
“The U.S. Congress was also concerned by executive pay, and it decided to wade into the issue by implementing a federal law in this area when it enacted the sweeping financial reform legislation known as Dodd-Frank following the financial crisis of 2007-2008,” Professor Geis said. “Importantly, Congress did not set maximum pay rules for corporate officers. The primary strategy of the federal approach was to offer information to shareholders about executive salaries and provide a way for shareholders to tell the board whether they approved or disapproved of current pay practices.”
On the upside, Professor Geis said, it resulted in something called a “say on pay” vote. This means that for any company that files reports with the SEC, shareholders could review corporate executives’ pay and vote on whether or not they approve of it.
The vote itself wouldn’t directly affect pay rates, but if shareholders rallied and disapproved of executives’ salaries and bonus packages, they could “conceivably kick out the current slate of directors during the next election cycle if [the directors] don’t amend executive pay,” Professor Geis said.
Dodd-Frank was partially repealed in May 2018 by the Trump administration.
George S. Geis, J.D., contributed to this article. Professor Geis is the William S. Potter Professor of Law at the University of Virginia (UVA) School of Law. Professor Geis received a B.S. in finance from the University of California, Berkeley, and he earned a J.D. with honors and an M.B.A. with honors from The University of Chicago.