CASE STUDIES IN BUSINESS ETHICS
Rabbi Jay Kelman CA
Can Executive Salaries Be Clawed Back?

NHL players recently agreed to a salary roll back of 24% to get back to 'work'. However shareholders of CIBC were not consulted for their approval to pay 2.4 billion dollars to settle claims stemming from its (alleged) involvement in the Enron fraud. At the same time CIBC was doling out millions of dollars in bonuses to the CEO and executive team - a team that ended up costing the bank more than an entire year's worth of profits. Should investors be entitled to recover these bonuses and perhaps even salaries from those responsible for such shocking ethical lapses?

Unlike the corporate world which is bottom line oriented Jewish ethics is predominately centered on intent. Results are ultimately in the hand of G-d and thus ethically it is our effort that counts most. Therefore an advisor who, because of a higher commission, gives inappropriate investment advice for a particular individual violates Jewish ethical cannon even if the investment doubles in six months. Yet an advisor who gives what he believes to be appropriate advice that turns sour is beyond reproach, notwithstanding the howls of protest from the innocent investor. Thus a CEO who makes an investment decision with the best interests of the company in mind bears no financial burden even if that investment costs the company millions of dollars. Who should have authority for such decisions is less an ethical question than a practical one.

However, if lawful investment decisions are made for reasons other than the best interests of the stakeholders involved a grievous ethical wrong has been committed regardless of the ultimate outcome. As we humans are unable to truly establish the intent - that is for G-d - Jewish courts can only deal with actual wrongs committed. While it may be immoral, it is not illegal to have ulterior motives. However income earned in an underhanded way would be subject to claw-back. Thus a bonus paid based on profits that then turn out to be non existent should be subject to repayment. Therefore any bonuses - cash or stock - paid to executives responsible for the Enron debacle should definitely be returned to the company.

The appropriate resolution is less clear in regard to salaries earned during this time. While many find the salaries paid to bank executives to be excessive in the extreme, they in of themselves, do not raise ethical issues. Jewish ethics regulates the manner in which money may be earned but not the amount that is earned. In the private sector it is market forces that determine salaries - and excessive salaries allow the ethical executive to give "excessive" amounts for charitable purposes. High salaries may not come at the expense of paying workers a fair wage and common sense dictates that wages be set up in such a way that promotes corporate harmony.

Jewish law distinguishes between employees and contractors, asserting that employees are paid for their time on the job and not for their work per se. Of course the better their work the more valuable their time becomes. Thus while incompetence may allow one to fire a worker it does not allow one to withhold pay. In practice negligence may not be grounds for withholding pay. It is only salaries earned fraudulently, it appears to me, that would
be subject to repayment. This would include time spent on illegal or even activities that contradicted their given mandate. Thus whether the CIBC executives should be forced to return their salaries depends on whether their activities can be shown to cross the line from incompetence to illegality.