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Justice in Compensation
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Business ethicists are quick to comment on sensational cases of compensation involving very high pay for CEOs and very low pay for workers in overseas factories and sweatshops. But why do they rarely discuss the ethics of compensation in general, including for “ordinary” workers?
Workers care about how much they get paid, and they most certainly view it in normative terms — fair or unfair, just or unjust, equitable or inequitable. Yet business ethicists rarely talk about ethics in compensation as a general matter. When they do, however, they focus on just the sensational cases. Why is there such a lack of discussion of justice in wages?
Bentley professor Jeffrey Moriarty explores whether there are good reasons why business ethicists tend to neglect issues of general compensation. He considers four possible justifications, and argues that none of them are convincing:
- Firms are wage takers
- What matters is wealth, not compensation
- Agreement about justice in compensation
- A tax and transfer scheme is the best feasible result
The first contention is that firms have no real power to change what they pay their workers; compensation is bound by market forces. Neoclassical economists believe that in a competitive market, paying more or less than the “going rate” causes companies to either suffer higher costs or lose employees to rival firms that pay closer to the going rate. Moriarty bluntly calls this false. Instead, he argues that companies have some flexibility about what to pay their workers, and can take ethical considerations into account.
According to the second argument, what matters is overall wealth, not compensation. That is, a person’s pay matters only in relation to the contribution it makes to how much wealth the person has. Moriarty says this is also false. The distribution of compensation among a firm’s workers is a classic problem of distributive justice: it is question of how to distribute a limited supply of goods among people whose demands for the good exceeds its supply. He also says that in addition to wages, wealth is a function of issues such as tax bracket and government social services. He concludes that wages do matter apart from their effect on wealth.
Fodder for the third point is founded on a fundamental agreement about justice in compensation. Moriarty challenges the principle that any compensation agreement reached between an employer and employee is just, provided there was no force or fraud. He points to societal regulations that limit compensation arrangements, including minimum wage laws and the Equal Pay Act. There is reason to believe that these laws reflect deeply held moral values about need and equality. If these are important moral values worth encoding in law, then there may be other moral values relevant to compensation worth considering also.
Fourth, Moriarty questions the assertion that moral debates about compensation are best solved by a tax and transfer scheme. Tax and transfer schemes are best suited to addressing alleged inequities in wealth, not inequities in compensation. The latter are best handled by individual firms, on a firm-by-firm basis. Some may believe that firms don’t care enough about justice, and simply won’t take moral considerations into account. On the contrary, Moriarty gives reasons to believe that firms can be persuaded to do what is right. Determining the right (or just) way to pay workers provides feasible options to help firms to adopt new compensation structures. In the past, firms have changed their ways in response to public pressure and regulation.
In his study, Moriarty challenges these widely accepted reasons for ignoring the normative aspects of compensation. Developing principles to evaluate the justice of a particular compensation package will not reveal what is fair in all cases, but will serve as a function of what is necessary to develop a comprehensive theory of justice.