The Ethics Of Pay In A Fair Society

Can companies ignore income inequality and just get on with the business of generating wealth, leaving governments to deal with redistribution? PwC finds out what do executives think.

For some time now, societal concern about levels of executive pay has been on the rise. Executive pay has been a lightning rod for broader concerns about inequality and a ‘system rigged for the elite’ which has been the backdrop to a number of recent elections and referenda across the developed world. Books analysing the problem — most notably Thomas Piketty’s Capital in the 21st Century — have been catapulted out of academic circles to the top of best seller lists.

Since the mid-1970s, real incomes in the bottom seven deciles of the global income distribution have risen by between 20 percent and 80 percent. And the proportion of the world’s population living on less than the World Bank’s poverty line of $2 a day has fallen from around 60 percent to 10 percent. Globalisation and free trade have pulled extraordinary numbers of people out of poverty across the world but real incomes for the world’s middle and working classes have stagnated or fallen, and so the greatest wealth generation mechanism ever seen in human history is being called into question.

This political context has led to a progressive tightening on the rules on executive pay. ‘Say on pay’ is spreading rapidly around the world, tougher rules on deferral and clawback of bonus are spreading beyond just the banking sector, and publication of pay ratios is being used as a way to encourage boards to think more fully about the question of pay fairness.

The public’s concern about inequality in different countries is not correlated with the actual level of inequality, but rather with their view of their personal prospects. Making society more equal may not help reduce the public’s concern if questions of security and income progression are not addressed.

Indeed, a recent article in Nature set out the wide body of evidence that, in most people’s minds, more fair does not necessarily mean more equal.