A Just Wage and Executive Salaries

Moral Guidelines in a Time of Crisis

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By Father John Flynn, L.C.

ROME, APR. 25, 2010 (Zenit.org).- As accusations over the responsibility for the global financial crisis continue apace, the subject of salary levels for executives remains a contested issue.

The British government announced a supertax on bonuses for banking executives, but a Jan. 8 report by the Financial Times said most London bankers will suffer little or no impact as banks will absorb all or part of the cost of the tax.

On March 20, the Financial Times reported that Richard Lambert, director-general of the Confederation of British Industry, the U.K.’s largest business organization, warned that top executives “risk being treated as aliens” by politicians and the public because their pay is so out of step with that of the population at large.

In the United States there was a small decline in the level of executives salaries last year, according to figures from a study published March 31 by the Wall Street Journal.

The median value of salaries, bonuses, and other incentives for the chief executives of 200 major U.S. companies declined 0.9% to $6.95 million, according to the article. In 2008, pay levels also fell, by 3.4%.

Nevertheless, salaries for many in the banking and financial sector, where the crisis began, continue to soar. According to a Feb. 23 report by Reuters, Wall Street paid out $20.3 billion in bonuses in 2009, up 17% from 2008.

Thomas DiNapoli, New York State’s comptroller, said that while bonuses are well below the level set in 2007 and are now more closely tied to company performance, many may consider them outsized given the lingering problems in the economy.

Last year was also a good year for hedge fund managers, the New York Times reported on Mar. 31. According to a report in a specialized financial industry magazine the 25 highest-paid hedge fund managers earned a collective $25.3 billion in 2009.

Ethics guide

A theological reflection on the subject of executive salaries was recently published in Britain. The Church Investors Group commissioned a study by Richard Higginson and David Clough, titled: “The Ethics of Executive Remuneration: A Guide for Christian Investors.”

According to their Web site the Church Investors Group began in 1973 as an informal ecumenical gathering of those with trustee responsibility for church investments.

Currently there are 37 members from all the main denominations in the United Kingdom and Ireland. The combined assets of the members total £12.6 billion ($19.3 billion).

The report starts by comparing executive salaries to the wages of ordinary employees using data from the companies that make up the Financial Times Stock Exchange 100 stock index (FTSE). They found that in 2008 the pay differential between chief executives and average workers in these companies stands at over 100 to 1. In 1970, the differential was approximately 10 to 1.2.

The average masks some major discrepancies between different companies, the report added. At the supermarket chain Tesco, the total salary package of chief executive Sir Terry Leahy adds up to £6.3 million ($9.6 million). This compares with an average employee salary of £11,918 ($18,298), giving a huge ratio of 526:1.

At Sir Martin Sorrell’s WPP it’s 550:1, but the average WPP employee gets over £42,000 ($64,483). By contrast, at British Airways chief executive Willie Walsh earned £701,000 ($1.2 million) and the average salary is £47,984 ($73,708). That represents a much smaller pay differential of 15:1.

The report explained that while U.K. salaries are still markedly less than those in the United States the American practices have exerted a major impact. Executive pay in France and Germany has also risen sharply during the last decade.


Even before the current economic crisis there were objections to salary levels for executives, the report noted, anchored in concerns over the ethics of high pay in general.

While critics recognized that senior executives did merit to be paid more, the massive wage differentials were seen as unfair and as overvaluing the contribution made by them in terms of higher productivity and profitability.

The counter-objection made to this argument is that it is the market that determines how much chief executives are paid. Since good executive talent is much scarcer than the skills of ordinary employees high salaries are necessary to attract the most talented staff. Moreover, if a company fails to pay a salary which is the going market rate, it won’t get the executives it needs.

The report’s authors admitted that there is some measure of truth in this reasoning, but added the observation that the market for executives is far from being a model of ideal competition.

The non-executive directors who set the salary packages are normally made up of people from the same circle of high-earning corporate executives, which raises questions about their independence of judgment, argued Higginson and Clough.

They also pointed out that salary levels for executives differ greatly from country to country, so it seems that rather than supply and demand pressures being responsible for very high salaries, in some places it would rather be the product of the culture in which companies operate.

Taking risks

Once the global financial crisis hit, there has been an increase in protests over what are seen as excessive levels of executive remuneration. This has been particularly concentrated on the banking and financial sector, held largely responsible for the crisis.

The report noted that one flaw that has come out of studies in the crisis is that if remuneration consists predominantly of cash bonuses that are paid out immediately there are strong incentives for managers to take risks.

Then, part of the justification for granting executives large incentives to take risks is that, should the decisions be mistaken, the executives will pay a penalty. But, the report declared that while in some cases individual bonuses may have been reduced or withheld, overall, senior executives escaped lightly for their mistakes.

In addition to the financial analysis, the report also ponders at some length the Biblical concept of justice, and passages in the Old and New Testament that can be applied to a consideration of a just wage.


The report concludes with an outline of four theological values that the authors consider useful in discussing executive salaries.

1. A concern for the poor. They recommend that investors should be more concerned with helping the poor than putting restrictions on the rich, and so they should be more active in ensuring decent levels of pay for those at the bottom end of the scale.

No theological principle will give us an answer to what the maximum pay should be, the report affirms. What we can do is focus on the ratio of the maximum to minimum salary levels in a company.

2. Just pay. At the same time the report affirms that an appeal to have unrestricted pay policies is contrary to distributive justice. So once more the authors of the report recommend that investors should examine the ratio between top executive pay and the average pay of the lowest 10% of employees. The authors of the report consider that it is hard to justify a maximum ratio of more than 75 times. As well, the report calls for salary packages to be made simpler and more transparent.

3. The dangers of wealth. Using high levels of pay to attract executives can lead to them being disproportionately likely to put their own financial interests ahead of those of the company and its shareholders.

4. Good stewardship. Remuneration levels should be based on long-term performance and
appropriate attitudes toward risk.

Finding a way to address the issue of executive salaries that will not only be economically sensible, but also ethically correct is a difficult task. This latest report fortunately provides some useful reflections on a hotly debated topic.

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