Public anger at irresponsible capitalism is based on the perception of inequities between pay at the top and bottom. Whilst the elite have seen increasing rewards, the majority have seen stagnation in wages and a decline in living standards. This symptom of irresponsible capitalism was scrutinised by the High Pay Commission, the 2011 independent inquiry into high pay. In an interim report, it observed: “Those who head our biggest companies have a responsibility to their workers and to the society they sit within. We should be demanding ethical leadership from our captains of industry regarding pay at the top.”^[1] In thinking about responsibility, however, it is worth reflecting more generally on the Commission’s appeal to companies so as to discuss how responsible capitalism might address the burning question of inequality at both ends of the pay hierarchy.

The High Pay Commission frames the issue of pay inequality as one of responsibility. Responsibility has for the last few decades dominated political rhetoric^[2], however, the searchlight of responsibility is always beamed on “the poor”. It is rarely the rich, despite the disastrous economic impact of the irresponsible behaviour of those in the City and the boardroom, who bear the brunt of this. The rhetoric of responsibility when applied to those at the bottom is often accompanied by denunciations of a supposed widespread “culture of welfare dependency”. Rather less is said about the culture of dependency among irresponsible employers who pay low wages subsidised by the taxpayer through tax credits.

The size of the tax credits bill in the context of austerity economics has been one factor in the growing interest on the left in “pre-distribution”, the rather clunky term used to talk about the original distribution of income and wealth as opposed to the post-tax and benefits distribution. Inequality in wages, particularly at the top, has been a key driver of the accelerating income gap in recent years (even though 2010-12 saw a – probably temporary – narrowing of the overall income gap). Responsible companies thus have a potentially critical role to play in reducing inequality.

The review of high pay in the public sector, carried out for the Prime Minister by Will Hutton, argued for “fair pay as a social norm” and recommended a fair pay code.^[3] The idea of ‘fair pay’ probably resonates rather more than that of “pre-distribution”. While Hutton’s review was specifically focused on the public sector, its findings have wider relevance. Hutton himself suggested that since “fairness is crucial in hard economic times… Government has an opportunity to use the public sector to set an example on fair pay to the economy as a whole”.^[4] Although principles of fair pay apply to the full range of the wages distribution, particularly with regard to the gender pay gap, the focus here is on the top and bottom.

Debating inequality: fairness and desert

The notion of fairness, as both Hutton and the High Pay Commission acknowledge, is “elastic” and “elusive”. Nevertheless, research suggests two broad orientations towards what constitutes fair pay. The first and more dominant is an individualistic orientation encapsulated in the notion of ”desert”. The second is a more egalitarian orientation, which judges fairness in relative terms. The concept of desert has emerged within numerous empirical studies^[5] as a critical criterion for assessing whether high pay is justified, and how the weight of the role and the responsibilities attached to it, together with the knowledge and skills required, should be recognised and rewarded.^[6] Yet there is also a view expressed that the risks and responsibilities associated with lower paid jobs, particularly involving caring, are often underestimated^[7] while, according to the High Pay Commission, the level of risk associated with senior roles is often overestimated.^[8]

Hutton relates reward for executive performance to “the achievement of organisations” long-term objectives and core function”^[9]: what politicians tend to describe as “rewards for success”. Whilst participants in an IPPR study considered “how hard someone works and how well they do their job” as important factors in the level of reward, some also pointed out that it is easier to measure and recognise performance in some jobs than others and were sceptical as to how far good performance is in fact reflected in pay at all levels.^[10] Their scepticism receives confirmation in a High Pay Commission discussion paper, which notes how since the mid-1990s, the link between executive pay and performance has led “to huge increases in performance-related remuneration” without a “corresponding leap forward in company performance”.^[11]

As for performance ”at all levels”, there appears to be an implicit, and sometimes explicit, assumption in much public debate that high earners deserve their rewards in part because of their effort and their contribution to success. Yet it is not axiomatic that their level of effort is so much greater than that of many people earning lower wages. Some people’s effort (and also skills and abilities) are valued more than others’, reflecting factors such as status, prestige and gender as much as effort and ability as such. This skewed perception of differential effort and ability is reflected in the common use of phrases such as “the wealth creators” to describe a small number at the top of private sector organisations, with the implication that wealth is not also created by the hard work and ability of the mass of employees. Such assumptions were challenged by many low to middle earners as well as public sector high earners in the IPPR study. A key finding was “a sense that the contribution of high earners is often overplayed while the contribution of the average worker is undervalued”. This failure “to recognise the contribution that most employees make to organisational success was… seen as a source of unfairness”.^[12]

This suggests that even if one approaches the question of what constitutes fair pay from the individualistic orientation of desert, it cannot be divorced from a more relative orientation. Indeed, a report of a JRF study observes that: “it was noticeable that the concept of desert employed by many participants to discuss earnings from work was a comparative one, incorporating an assessment of the relative levels of reward for different individuals’^[13]. Emphasising the importance of collective endeavour in the creation of value and an organisation’s success, Hutton argues that the fruits of that success should not therefore accrue ”disproportionately to particular individuals. Proportionality thus implies some limit on pay dispersion between high and low earners”.^[14]

From low to fair and decent pay

Both the JRF and IPPR studies found a concern about low pay and a belief that the minimum wage is too low. This was seen as unfair on grounds of lack of recognition of the effort involved or the contribution made or of failure to meet needs – reflected in the growing political support for a ‘living wage’. According to the Resolution Foundation’s Commission on Living Standards, given that 20 per cent of the UK workforce are paid less than the living wage, the minimum wage, successful as it has been, does not of itself constitute a policy for tackling low pay. In the context of the decline in private sector collective bargaining coverage, it recommends that the Low Pay Commission’s remit should be widened to cover an assessment of which sectors could sustain a non-mandatory “’affordable wage’ higher than the national minimum”.^[15] This, it suggests, could be enhanced by “a more experimental approach” that would for instance encourage new pay norms. To this end, the Commission on Living Standards supports greater pay transparency and recommends that the Corporate Governance Code is amended to require large companies to report the proportion of their workforce paid below a low pay threshold such as the living wage or the OECD’s threshold of two-thirds of the national gross median hourly wage.

Despite the impressive success of the living wage campaign, the idea of a living wage is problematic because it “confounds hourly gross wages for an individual with weekly disposable income for a household”.^[16] Wages cannot take account of family size – indeed that was one reason for the introduction of family allowances – and therefore the idea that a living wage can accommodate the diverse family circumstances of workers is misleading. In contrast, a threshold linked to the median wage links the rewards for a worker’s contribution not to basic needs but to the rewards for others’ contributions. The notion of a ‘decent wage’ better captures the idea that every worker deserves a decent reward for their efforts. It also chimes with the broader vision of “decent work” promoted by, among others, the International Labour Organisation and the UN Economic and Social Council. Decent work is about working conditions and security as well as pay and is premised on recognition of human dignity.

There is no need for the responsible business to wait for a lead from government or the Low Pay Commission to assess whether it can afford to pay its low paid workers a decent wage. It could take on board and adapt Hutton’s Fair Pay Code, including its proposed “fair pay process”. As part of such a process, Hutton suggests that “to reflect the social nature of the organisation and the fact that organisations’ success is the product of collective efforts by the workforce as a whole, the process for determining senior pay must take account of the relationship between senior pay and that of all employees, and must give a voice to the wider workforce”.^[17]

Imagine a Rawlsian “veil of ignorance” exercise whereby all employees are asked for their views about the appropriate range of rewards. Of course, this would be only partial ignorance because participants would know roughly where they were placed in the company hierarchy but they would not know what other workers are paid. Indeed, despite public concern about wages inequality people tend to underestimate significantly just how high pay is at the top. A Rawlsian veil of ignorance exercise followed by an actual pay audit (which also incorporated the gender dimension) would thus probably make for uncomfortable reading. But, provided that the results weren’t ignored, such an exercise could enhance employee motivation and engagement, which are “significant determining factors in business success”.^[18]