Egalitarianism and Executive Compensation: A Relational Argument

Abstract

What, if anything, is wrong with high executive compensation? Is the common “lay reaction” of indignation and moral outrage justified? In this paper, my main goal is to articulate in a more systematic and philosophical manner the egalitarian responses to these questions. In order to do so, I suggest that we take some insights from recent debates on two versions of egalitarianism: a distributive one, according to which no one should be worse off than others because of unfair distributions of goods and resources, especially ones based on matters of luck or arbitrary factors, and a relational one, which maintains that egalitarian justice requires members of a society to relate to one another as equals. Drawing on recent attempts to highlight the tricky nature of managerial authority, I argue that high inequalities in pay are not simply a distributional matter but should also be analyzed through a relational lens. I also attempt to show that relational egalitarians are well-equipped to question the now dominant “incentives” view of CEO compensation.

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Notes

  1. 1.

    Quite uncontroversially, I will refer to “executive compensation” as the total reward provided by the firm to the top level of executives in a corporation. This consists in packages that may include any or all of the following: salaries, bonuses, incentive payments, deferred compensation, plans, stock options, and the direct provision of goods and services. I will focus here on chief executive officers (CEOs), while being aware that executive compensation refers to what chief operations officers (COOs), chief financial officers (CFOs), and other executives who occupy the very highest level of management receive. For such a definition, I draw on Kolb (2006, p. 1).

  2. 2.

    In this paper, I am using “relational egalitarians” and “relationalists” as synonyms (and I am doing the same with “distributive egalitarians” and “distributivists”).

  3. 3.

    Moriarty does not defend a libertarian approach, but does a good job at showing why libertarians ought to care about the ethics of executive compensation..

  4. 4.

    John Roemer presents a different version of this objection. He argues that the creation of such a class of “high flyers” is socially costly because it gives a lot of political power to the members of this class and levels up consumption standards (Roemer 2011).

  5. 5.

    For example, in the UK, only one-third of the public trust corporate executives (Hargreaves et al. 2010, p. 31).

  6. 6.

    This is what the authors of the High Pay Commission report refers to as the “business case” for “fair pay.”

  7. 7.

    John Boatright (2010) is a notable exception since he tries to draw attention to this variety of objections and provides us with a list of nine (quite of often related) objections to high executive compensation. However, he does so without trying to clarify the differences in nature and scope between the various objections.

  8. 8.

    Boatright (2010) presents Morgan and Drucker’s views.

  9. 9.

    I am referring to the “incentives” argument while Moriarty refers to this as the “utility” argument. I prefer this label because it captures a trend in the economics of executive compensation to stress the importance of “incentives” in well-designed compensation schemes.

  10. 10.

    See Hsieh (2006) who argues that justice matters for the management and governance of business firms in an indirect way.

  11. 11.

    I am using Arneson’s own way to frame the debate. (Arneson 2013).

  12. 12.

    This characterization remains tentative and probably incomplete since the literature is burgeoning, but I nonetheless hope it provides a useful portrait of the relational approach. See Fourie (2012) for an excellent recent contribution.

  13. 13.

    Here, it is worth mentioning that although it is possible to see relational equality as one component of justice, there might also be a conflict between justice and relational equality. For instance, Wolff takes very seriously the idea that the relational commitment to equal respect might conflict with justice understood in terms of fairness (Wolff 2010). For the sake of this paper, I do not examine this claim and assume that relational equality is a component of justice. This is important since I am claiming the justice is a central feature of the egalitarian objection to high executive compensation. I would like to thank one anonymous reviewer for urging me to mention this point.

  14. 14.

    This has been powerfully argued by Bebchuk and Fried (2006). See also Bivens and Mishel (2013), who argue that the rise in CEO pay represents a form of rent-seeking.

  15. 15.

    Piketty’s book just appeared in English at Harvard University Press (Capital in the 21st Century 2014).

  16. 16.

    Piketty’s results are important because it highlights a significant trend in executive pay and how it contributes to growing inequalities. It gives us reason to put aside special scenarios of hierarchical organizations like sports teams, in which managers (coaches) earn less than those who work under them (the players).

  17. 17.

    Here, as one reviewer notices, if this is true it could be said that Roemer’s point is subject to a version of the “wrong target” argument, recommending that society take steps (such as campaign finance laws) to rein in the political power of the class of executives.

  18. 18.

    Here it should also be noted that most members of the class of elite executives are white men. Only a few CEOs of top companies are white females or members of ethnic/racial minorities (Cook & Glass 2013; Smith 2002). From an egalitarian point of view, this raises important issues related to the tendency of economic elites to reproduce themselves through both exclusionary and inclusionary processes, as Smith suggests (Smith 2002). However, due to space constraints these issues cannot be addressed here.

  19. 19.

    I am adding the term “respect” here, since it provides a more complete articulation of what Anderson of hierarchies in esteem. These hierarchies, in Anderson’s account, seem to represent a denial of equal respect.

  20. 20.

    Interestingly, Kolb labels this kind of argument as a “communitarian” one (2006, p. 8). I maintain that my argument can be articulated without a specific commitment to communitarianism.

  21. 21.

    The argument is that the reward to a highly paid executive for bargaining for more compensation was modest when top marginal tax rates. High earners executives started bargaining more aggressively to increase their compensation when top marginal tax rates decreased (Alvaredo et al. 2013, p. 10).

  22. 22.

    It has to be noted that according to Anderson and Kibe, the relational approach precisely seeks to give us both a better empirical sketch of various sources of inequalities and a richer normative account of them (Kibe 2011).

  23. 23.

    I would like to thank two anonymous reviewers for encouraging me to reply to this objection.

  24. 24.

    It is worth noting here that several initiatives and developments in managerial thinking rely on this idea. The relational approach provides normative grounds for them.

  25. 25.

    Interestingly, empirical research on workplace gender discrimination suggests that it is the common stance adopted by female workers. According to Dubet, the typical message sent by many female workers is “Equal standing should be first, hierarchical rules come after” (Dubet 2006, p. 71).

  26. 26.

    Piketty and Alvaredo et al. argue that lower taxes might contribute to high executive compensation. When top marginal tax rates fall, high earners have an incentive to use their bargaining power to increase their compensation, since the net reward of doing so is high (Alvaredo et al. 2013). This is an important result, since it shows that tax rates and compensation practices are not totally distinct and separate.

  27. 27.

    It also seems plausible to argue that inequalities in pay between workers and executives are irrelevant by adding a “prioritarian” component to egalitarian justice, one that invites us to give strong priority to the genuinely worse-off: the unemployed poor.

  28. 28.

    See Wolff for similar remarks about the hesitations of current egalitarians (2010).

  29. 29.

    For a good account of the deep-rooted belief in the importance of leadership and “romanticized” versions of it, see Meindl et al. (1985).

  30. 30.

    I would like to thank an anonymous reviewer for mentioning this plausible response to me.

  31. 31.

    Feinberg (1970, p. 91), my emphasis.

  32. 32.

    This is a challenging question for egalitarians, given that part of the reason why the incentive view seems so appealing is that it puts aside problems related to desert and its evaluation, difficulties that they are well-equipped to highlight, having developed highly sophisticated arguments about matters of luck and the arbitrary distribution of talents. But, as Peter Dietsch remarks, ultra-sophisticated egalitarians arguments about quite abstract issues such as desert, luck and natural endowments occurred while economists were by and large mainly concerned with incentives structures of labor markets (Dietsch 2012). For a good analysis based on justice considerations of the argument, see Shaw (2006).

  33. 33.

    Rawlsians can argue here that the high salaries provide incentives for talented executives to work harder, assuming that it will improve the position of the worst-off.

  34. 34.

    I am mentioning here that Cohen’s point is made in a “fairly” abstract way, i.e., he does not really examine in a developed way what is happening inside business organizations (corporate governance structures, managerial authority and so on). It is true, however, as one reviewer astutely remarked, that in all fairness Cohen’s argument clearly opens the doors to a sophisticated discussion of these issues, since he wants to draw attention to the behaviors of individuals outside the basic structure of society. My aim therefore is not to dismiss his argument, but to push a bit further by highlighting the tricky hierarchical relations in which the demand for incentives is made.

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Acknowledgements

This work was generously supported by the Centre Éthique Entreprise et Économie at the Lille Catholic University (France) and the Emile Bernheim Foundation (Belgium). For helpful comments on first versions of this paper, I thank the audience at the 2012 International Bernheim Workshop on Fair CEO Compensation, (Louvain-la-Neuve/Brussels, Belgium), and the Practical philosophy workshop at the Lille Catholic University (France). I must thank Axel Gosseries for his comments, but also for his role in organizing and designing the Annual Workshop as a part of his Bernheim course “Social Responsibility in Economic Life”. For comments and discussions on this paper I also thank Malik Bozzo-Rey, Peter Dietsch, François Hudon, Xavier Landes, Jeffrey Moriarty, David Robichaud, Camille Ternier, Raphaelle Thery and Patrick Turmel. I also owe special thanks to Sandrine Blanc, Juliana Uhuru Bidadanure and Laurent DeBriey for extensive and constructive written comments and criticisms on a first draft of this article. I finally thank three anonymous Journal of Business Ethics referees for their excellent suggestions.

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Néron, PY. Egalitarianism and Executive Compensation: A Relational Argument. J Bus Ethics 132, 171–184 (2015). https://doi.org/10.1007/s10551-014-2312-7

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Keywords

  • Executive compensation
  • Egalitarianism
  • Justice
  • Business organizations (normative analysis of)
  • Managerial authority
  • Relational equality