Morals and markets and outlandish CEO pay

Markets and morality: a tale of two uproars - reaction to the 2008 financial upheaval. Reuters photo

One of the searing issues in society is that of the pay difference between those in management and the "ordinary worker", especially the pay gap between chief executives and workers. On Twitter this week the US figures were again highlighted with tweets discussing data that CEO pay growth from 1979-2019 was 1167%, whereas worker pay growth from 1979-2019 was 13.7%. These US figures came out last year in a report by the Economic Policy Institute. 

The global picture was given publicity in 2014  with the examination of attitudes in 16 countries to this matter. One of the glaring findings was that people do not realise what the gap in pay levels is within a typical company. For example, the study found that Americans thought the pay gap was in the order of 30:1; in fact, it was 350:1 (using 2012 statistics). That ignorance, the researchers said, probably allowed CEO pay to broadly remain unchallenged. 

Business observers often cite self-interest and greed, not productivity or profitability, as the reasons for the lack of consideration of other stakeholders in the company, such as workers, especially at the production level overseas. One commentator on these statistics stated that their positions of power allowed that the business leaders' immorality to flourish: 

The reasons for this power are are many, including the fact that CEOs serve on each other’s corporate boards and are generous to each other. They pay the fees of corporate compensation consultants, who typically recommend generous raises, studies show. They pay the fees of board directors, who were paid an average of $255,000 in 2014 at the top 500 companies, which had increased 50 percent since 2006, a Boston Globe analysis found, and which has probably increased significantly since then. And the board members who earn these fees for a few hours work per week are, in turn, generous to the executives who pay them.

In short, its about insider power, not payment for skills. “CEO compensation could be reduced across the board and the economy would not suffer any loss of output,” the report notes.

As to the what many see is the failure of the players in business - as in society in general -to maintain a moral sense, Jonathan Sacks, in his 2020 book*, urges everyone to rethink neglect of behaviours that respect the common good:

There is no question that the behaviour of banks, other financial institutions and CEOs of major corporations has generated much anger at the most visceral level. After all, gut instinct is what drives our feelings of justice as fairness. But that behaviour is the logical consequence of the individualism that has been our substitute for morality since the 1960s: the ‘I’ that takes precedence over the ‘We’. How could we reject the claims of traditional morality in every other sphere of life and yet expect them to prevail in the heat of the marketplace? Was that not the point of the famous speech delivered by the actor Michael Douglas in the film Wall Street that ‘Greed – for lack of a better word – is good’? Greed ‘captures the essence of the evolutionary spirit’, he said: it marks ‘the upward surge of mankind’.

Markets don't distribute rewards fairly

 In a world where the market rules and its operation is driven by greed, people come to believe that their worth is measured by what you earn or can afford and not by qualities of character like honesty, integrity and service to others. Politics itself, because it can assume no shared morality among its citizens, ceases to be about vision, aspiration and the common good and becomes instead transactional, managerial, a kind of consumer product: vote for the party that gives you more of what you want for a lower price in taxes. You discover that politicians are claiming unwarranted expenses or getting paid for access: in short that politics has come to be seen as a business like any other, and not an entirely reputable one. That is when young people no longer get involved. Why should they? If all that matters is money, they can make more of it elsewhere.

However, Sacks is not advocating the overthrow of the free market system. But he is saying that when the morality that made the markets work, involving trust and confidence and faith in people and their words and signed documents, is neglected, "something significant is going wrong". He explains:

The market economy has generated more real wealth, eliminated more poverty and liberated more human creativity than any other economic system. The fault is not with the market itself, but with the idea that the market alone is all we need. Markets do not guarantee equity, responsibility or integrity. They can maximise short-term gain at the cost of long-term sustainability. They cannot be relied upon to distribute rewards fairly. They cannot guarantee honesty. When confronted with flagrant self-interest, they combine the maximum of temptation with the maximum of opportunity. Markets need morals, and morals are not made by markets.

They are made by schools, the media, custom, tradition, religious leaders, moral role models and the influence of people. But when religion loses its voice and the media worship success, when right and wrong become relativised and all talk of morality is condemned as ‘judgemental’, when people lose all sense of honour and shame and there is nothing they will not do if they can get away with it, no regulation will save us. People will continually outwit the regulators, as they did by the so-called ‘securitisation’ of risk that meant no one knew who owed what to whom.

Markets were made to serve us; we were not made to serve markets. Economics needs ethics. Markets do not survive by market forces alone. They depend on respect for the people affected by our decisions. Lose that and we will lose not just money and jobs but something more significant still: freedom, trust and decency, the things that have a value, not a price.

*Jonathan Sacks, 2020, Morality: Restoring the Common Good in Divided Times, Hodder & Stoughton/Hachette, London and New York.