The Right Approach To Executive Pay

Unless you have been living in a cave for the past few years you’ll be all too aware of the heated debate about the growing divergence between senior executive and average employee pay, particularly in the developed world.

According to the Economic Policy Institute, in 1965 bosses of the largest companies in the U.S. earned around 20 times more than their average employee. By 1989 the number had more than trebled to 58 times. Today it’s over 300 times and rising. And some CEOs are making astronomically more than their workers.

So far, the great bulk of research into pay inequality and what it means for both business and wider society has been carried out by what some people might describe as the ’usual suspects’ – economists, legal scholars and political scientists. But recently I’ve been working on a new philosophical approach to the conundrum with Dr Susanne Burri, a top philosophy specialist at LSE. Our project aims to improve the quality of public debate about high pay by introducing executives, policy-makers and the ‘informed public’ to the language of ethics and to a set of ethical concepts. We believe it’s unique in that it applies rigorous philosophical thinking about justice to the problem of high executive pay.

To try to establish what business leaders really think about what we call ‘distributive justice’, we undertook a survey of over a thousand executives around the world based on a philosophical thought experiment originally devised by the famous Harvard philosopher, John Rawls. We asked executives to imagine living in a world where they had no knowledge of their personal characteristics and social position – they might be among the poorest members of society, or the richest, or anywhere in between. Rawls called this the ‘original position’ and intended it to be a fair and impartial perspective from which to develop fundamental ideas about distributive justice.

The results of our survey show that executives believe that the concept of equal opportunities – based on Oxford philosopher Ronald Dworkin’s argument that incentives and rewards for effort might be justified even if inequality of resources and opportunities are not – is the most important theory of distributive justice which should apply at society level. They said things like: “A society in which wealth inflation is greater than the savings potential of average wages will never be just – we need a way to address this which makes property and wealth accumulation more accessible for all.”

However, at company level executives strongly endorse the principle of desert, the idea that some people deserve to receive certain economic advantages in light of their contribution, effort, experience, or because of the demands of their jobs.

Our research also suggests that companies have a direct role to play in bringing about distributive justice through their policies and procedures. The business leaders we surveyed do not think that matters of distributive justice should simply be left for governments to deal with, although they do believe that governments have an important role to play.

Executives also seem to recognize that there is currently a significant deficit in distributive justice at both society and company levels. Why then – you might ask – have companies and investors been unable to resolve the issue of high pay satisfactorily?  Our research explains how a collective action problem, faced by investors in companies with widely dispersed shareholdings, and a prisoners’ dilemma, confronted by remuneration committees, have resulted in systemic problems which have led to the steep rise in executive pay over the last twenty years.

We conclude that placing legal or moral obligations on companies to restrict executive pay is problematic. However, this does not mean that companies are absolved of their moral responsibilities in relation to high pay. Executives must accept ethical restrictions on the rights that they have to retain excessive income. Companies are morally obliged to pay all their workers, including those working in their supply chains, a real living wage. And governments have a moral responsibility to ensure that there is distributive justice in society. This may require stricter codes of corporate governance and higher marginal tax rates.

We also conclude that more work is required on a ‘virtue ethics’ approach to business ethics. This idea has its roots in the philosophical ideas of the Ancient Greek philosopher Aristotle, who believed that society could not flourish in the absence of critical virtues such as generosity, forbearance and honesty. In the same way, we believe that there is now a need for a much greater focus on moral character in business and management. Because without it, the gap between the super-rich and everybody else in the business world is set to grow and grow.

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