With growing wealth disparity around the world (the eight richest people are worth as much as half the world’s population) and the erosion of the wealth of many families, executive compensation has come under serious scrutiny. A recent study by PwC in partnership with the London School of Economics, “The ethics of pay in a fair society — What do executives think?”, looks at how executives around the world consider principles of distributive justice as they apply to compensation in their organizations and society.
The key challenge in distributive justice is that some of the basic principles of fairness are mutually incompatible. Consider principles based on need, equality and contribution, for example. Only in the truly exceptional case where all people have the same exact needs and have performed exactly the same will the principles agree. Thus, as the researchers argue, achieving complete perceived fairness is an impossible task. An encouraging result of the PwC study is that executives have views of fairness that acknowledge this conundrum. They tend to show the strongest support for four very different principles:
It seems rather than thinking the market should decide, or that pay systems should ensure that individuals be able to live a dignified life, executives believe compensation at the organizational and societal levels should incorporate elements of both. This is heartening because in the perfect world there should always be some balance. Contribution-based principles provide an incentive for performance, need-based principles ensure basic dignity is met for most people and equality-based principles ensure some sense of shared identity. The trick is to find the right balance.
The authors identify four groups of people, or “tribes”, that address this question of balance in different ways, giving greater weight to a one or two principles over the others; one intriguing result is that older people would rather have the market decide, while younger people prefer protection on basic needs and dignity in our compensation systems. Moreover, in the case of both companies and society, respondents generally believe that we are failing, not only to meet standards for equality of opportunity, but also to provide compensation sufficient for basic human needs and a sense of dignity.
Why should we care? Given the growing concern over inequality in the world, it is incumbent upon us to create systems that ensure market success and performance for our firms, but also remember the lessons of Louis XVI and the Romanovs. If key principles of fairness are not met, societies tend to crumble and those on top find themselves in unhappy circumstances. As Will and Ariel Durant noted, when such an imbalance has existed historically, we’ve seen a correction either through “legislation redistributing wealth or by revolution distributing poverty”.
Dr. Robert Kuipers
Partner People & Organisation PwC
+41 58 792 45 30
Partner People & Organisation, PwC
+41 58 792 46 08