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Distributive Justice and CEO Compensation (Revised December 2007)

Aug 2006
Working Paper
05-020
By  Guillermina Jasso, Eva Meyersson Milgrom
This paper develops a framework for studying individuals’ ideas about what constitutes just compensation for chief executive officers (CEOs) and reports estimates of just CEO pay and the principles guiding ideas of justice among students pursuing a Master’s of Business Administration (MBA) degree in Sweden and the United States. The framework, based on justice theory and making use of Rossi’s factorial survey method, enables assessment of three main sets of quantities: (1) the just CEO compensation, in the eyes of each observer; (2) the principles of microjustice – observers’ ideas about “who should get what” based on characteristics of CEOs and their firms; and (3) principles of macrojustice – ideas about the just level and dispersion in compensation across all CEOs. Our estimates of respondent-specific just CEO pay and principles of microjustice and macrojustice yield the following main results: First, within three country-and-gender-specific subsamples, there is broad agreement on the median just CEO compensation but substantial inter-individual variation in the principles of microjustice and the other principles of macrojustice. Second, there is remarkable similarity in the distributions of the principles of microjustice and macrojustice across the three samples. Other important results include a pervasive gender attentiveness among MBA students and tolerance for large variability in CEO pay.