But it's not; the compensation is for foregoing having someone else pay a large cost for you to be guaranteed travel in business class, and thus to save the company as much money as possible by buying the cheapest possible Y ticket. If the cheapest possible Y ticket is upgradeable and if the traveler chooses to spend his/her own miles/certificates/money to upgrade, then the company's policy has been followed and there is no ethical issue.

The compensation isn't there as a reward for some sort of self-flagellating masochistic mentality, it is there to encourage employees to act in a way that saves the company as much money as possible. If employees can preserve the maximum savings possible in a given situation, then there is no ethical violation if they choose to use their own resources to upgrade.