Finance

The CEO and upper management of a company are extremely important in planning the long run vision of the company and laying the path that will see it grow or fall in the future. As such the decisions taken in the board rooms and the high offices dictate to a great extent whether the business will be profitable or incur losses. Studies have even been conducted that point to a strong correlation between quality of the upper management and strong and sustained profits. Therefore, their role is extremely important in an organization which is one of the reasons executive compensation is strongly linked to performance and is the highest in the organization (Elig 2007). The question that arises then is whether pay rise should be quelled when the company does not perform well This question surfaced in the recent financial crisis as well as AIG and other institutions doled out huge bonuses after getting bail out money from the government. Analyzing the different angles requires looking at things from the lens of various ethical perspectives.

The deontological perspective points out that an act may be inherently right or inherently wrong. This has nothing to do with the consequences but rather focuses on the very nature of the act itself which may go against a maxim, defined by rational individuals, no matter how fruitful the consequences of the act may be (Edel 1993). Thus from this perspective, since upper management is more responsible for the profitability of the business than any other stakeholder, they should get the highest amount of compensation compared to other workers when profits are flowing in (Carrol 2008). However, when the company is lagging or facing bankruptcy, the responsibility falls on the shoulders of upper management because they should have seen to the forthcoming and taken appropriate action to hedge against it or reduced exposure. Therefore when fortunes decline, pay rises or bonuses are not at all ethical for the upper management when the company faces bankruptcy, from a deontological perspective.

Virtue ethics has a different take on the issue. It focuses more on the nature of the personalities involved and the character of the moral agent (Edel 1993). It thus specifies certain virtues that should exist in a person to result in virtuous behavior and thus be ethical. There is no focus on consequences or the inherent nature of the act. From this standpoint, it has to be considered that the decisions of the upper management not only govern the direction of the organization, but also the salaries that will be received by the workers and potential layoffs as well (Crane 2007). It may also impact the funds organization is able to make available for social causes. Thus, when these decisions lead to potential bankruptcy, it has a multiplier effect on other stakeholders as well. In such an environment, if the upper management get bonuses, it results in a disparity as every other stakeholder is suffering. Virtue ethics thus states that for the virtuous character to be achieved by the management, these bonuses should not be taken. This was echoed in the statement given by the new CEO of AIG after the case of bonuses being given to the upper management following bailout when he said that the bonuses were legal because they were agreed prior to the financial crisis but asked the upper management to return them on their own account.

Consequentialism can be said to be one of the most useful ethical frameworks with regards to the matter at hand. It basically considers the costs and the benefits of a particular act and analyzes the decision from the impact that it has on the various stakeholders and prefers the one where the benefits are maximized and the costs are minimized (Edel 1993). First off, there are many adverse consequences of the upper management getting bonuses when performance is adverse. It puts additional strain on the financial resources of the company in dire times as executive compensation is significant and it may potentially hamper the liquidity position of the company as well as leave less money for operations which will be crucial at the stage. The already bad condition may go worse if large amounts are doled out to the upper management.

Secondly, it harms the lower management and the line workers of the organization. They do not have as significant a say in the direction of the company and in decision making and thus may only be spectators of the decisions taken by the CEO, thereby making them a simple casualty of the dire economic condition. Thus layoffs or pay cuts may be the ultimate outcome. This could be avoided or its impact lessened if executive bonuses are curtailed at the time as these workers will be more in need of the money as compared to the fairly rich upper management. There is also the case of the act harming the culture of the organization and the notion of reward for performance. As the workers get additional compensation for the more and better work they do, bonuses to upper management when company is on the brink of bankruptcy may serve to psychologically affect the workers who may reduce their effectiveness and efficiency as such moves are led by example and follow a top down approach.

On the other hand, consequentialism does make a slight case for the executive bonuses in dire times as well. When the performance of the company in tanking, there is a need for bright minds and those familiar with the organization to stick with it and navigate it out of the troubled waters (Eleg 2007). At a time such as the recent financial crisis when all financial institutions faced declining financial figures, the ones with the fastest recovery would be able to enjoy better profitability. Since the existing management may be in the best position to guide the institution out of the trouble times, there is a strong incentive for the company to retain them. The CEO and the upper management may leave the company and go in search of others and may even be approached by various organizations looking to draw them towards themselves (Carrol 2008). Thus bonuses in such times may serve to keep the management at the company and provide them with an incentive to work towards the recovery of the company as they may be the only ones in possession of certain information about the operations of the organization that can steer it to better performance.

Having analyzed the three approaches towards the issue of executive bonuses in a near bankruptcy situation, it appears that the deontological and the virtue ethics perspective looks at the act as unethical. This is because it is not becoming of a moral character and the act itself is not consistent with the ways and hence inherently immoral. On the other hand, consequentialism provides a case for the bonuses in terms of retaining the management but it also points to several disadvantages of the move. In the end the issue comes down to what is more certain in terms of impact. The existing management may have been incompetent to start with having brought the company to such a stage and trusting it further with additional bonuses may not only be taking a risk but also taking away any incentive for them to work harder as the bonuses have already been provided. Thus giving bonuses to upper management and CEO when the company is approaching bankruptcy is an unethical act.