Excessive levels of executive pay are headline news and have become a focal point of public scrutiny and academic debate. The wide – and increasing – ratio between executives’ and workers’ pay raises questions about corporate ethics, fairness, and societal impact. Yet executive pay decision-makers report on significant challenges in translating ethical principles into practice and perceived unfairness in executive rewards persists. Dr Sue Shortland reports on recent research.
I
n their academic paper “Bridging Theory and Practice: Ethical Governance of Executive Compensation
in the Financial Times Stock Exchange 100”*, published earlier this year Perkins and Shortland report that the Chief Executive Officer (CEO)-to-worker pay ratio stood at 324:1 among Standard and Poor’s 500 companies in 2022, up from 61:1 in 1989. Not only is the differential considered to be egregious but it continues to increase. Media headlines regularly
identify not only examples of excessive executive pay but place these in the
context
performing businesses. This underscores the need to examine ethical and moral dimensions of executive compensation governance.
ETHICAL VERSUS MORAL CONSIDERATIONS Ethical considerations typically refer to externally defined standards of right and wrong conduct. These are often codified in rules or principles and include transparency, accountability and compliance. Moral considerations refer to
an individual’s principles of right and wrong. These are shaped by personal values, cultural norms, and societal
expectations and
include fairness, proportionality and sustainability.
of poorly
ETHICAL PRINCIPLES It is important as a first step to understand the different definitions of ethical principles and their interplay within executive compensation, namely those of utilitarianism, deontological ethics, and virtue ethics. Utilitarianism focuses on the
greatest good for the greatest number of people and has relevance as to how executive compensation contributes to overall societal welfare. This ethical perspective raises questions as to how high executive pay can be justified in relation to average worker compensation and broader economic inequality. Deontological ethics emphasises
moral duties and obligations, prompting consideration of the moral responsibilities of executives, board members, and shareholders to ensure that compensation practice is fair and just. Virtue ethics focuses on the
character of individuals, raising questions as to how compensation structures can promote virtuous leadership and ethical behaviour as a priority within corporate culture. Applying ethical principles in
executive compensation governance generates complexity for decision- makers. Board members who sit on Remuneration Committees (Remcos) who decide the formulae for
determining executive
compensation must balance various ethical considerations
with practical business needs and manage potential conflicts between shareholder interests, executive motivation, and broader stakeholder concerns. There is also the
need for
regulatory compliance and demands for transparency in executive compensation reporting and these raise implications for issues of trust, accountability, and fairness.
THE ROLE OF CORPORATE SOCIAL RESPONSIBILITY There is a growing emphasis on businesses demonstrating Corporate Social Responsibility (CSR) as part of their wider ESG (Environmental, Social and Governance) strategies and this places additional demands for ethical considerations in executive compensation decision-making. For example, linking executive compensation to broader CSR goals and metrics raises questions about how to incentivise ethically long- term, sustainable value creation, as well as concerns about the potential for manipulating CSR metrics through the commodification of ethical conduct. In globally-based organisations,
a further complexity arises through the need to navigate diverse cultural contexts and how to reconcile differing cultural perspectives and local norms in respect to fair compensation and ethical principles.
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GLOBAL LEADERSHIP
E SG / COMPENSATION
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