Alexander ‘Sandy’ Pepper’s new book, If You’re So Ethical, Why Are You So Highly Paid?, is published open access by LSE Press. Here, Sandy discusses his research and his experience of publishing with LSE Press.
Hello Sandy. Congratulations on your new book, could you tell us a little bit about what motivated your investigation into executive pay?
I have been thinking about executive pay for over 30 years, first as an advisor on the tax and legal implications of compensation, benefits and incentives while a partner at PwC, and latterly as an academic. In previous books I have written about my research on the psychology and economics of top pay. This time I wanted to investigate the ethics of top pay. I teamed up with a philosopher, Dr Susanne Burri and a sociologist, Dr Daniela Lup. Using a thought experiment, and by collecting data from survey of eleven hundred senior executives, we investigated executives’ beliefs about distributive justice.
You speak about some of the research involved in writing your book in your recent opinion piece for The Guardian. What were the most surprising conclusions of this research?
In some ways the most surprising thing was the way in which senior executives engaged with the research. Senior executives appear to consider distributive justice to be a matter of great importance. Anecdotal comments showed that they took the survey process very seriously, telling us about the amount of time that they had taken to digest the questions and reflect on their answers. They agreed or strongly agreed with more principles of justice than they disavowed. The narrative comments that many of them provided were consistent with a serious ethical perspective on pay and inequality.
For those who haven’t read your book yet, how would you summarise its key message?
Over the past 30 years we have seen unprecedented inflation in the remuneration of senior executives – the people who the French economist Thomas Piketty describes as “super-managers”. To illustrate this, for example, between 2000 and 2015 FTSE100 CEO pay rose at an annualised rate in excess of 10% per annum, while average national earnings increased at around 3%.
Nevertheless, my research shows that senior executives are not in the main the self-interested ethical egoists of popular culture – some are, but most are not.
What then explains the inflation in executive pay – or if you prefer, to pose the question in the book title: “If super-managers are so ethical, why are they so highly paid?”. Super managers are the most fortunate beneficiaries of a market failure. A prisoner’s dilemma at the heart of the work of remuneration committees means that all companies end up paying over the odds. When it comes to top pay, for too long companies have behaved as if they are in the equivalent of an arms race. The system is broken – it isn’t fair or efficient.
What’s the best way for investors, companies and executives to resolve the ethical question of inflated pay at the top?
Investors, companies, and executives need to recognise inflation in top pay for what it is – an important ethical problem. They cannot say that CEO pay is determined by market forces or is aligned with companies’ financial performance – it isn’t.
Investors have a responsibility to steward their assets properly. This includes ensuring the executives who run their portfolio companies do not extract economic rents in the form of excessive pay. Companies have a responsibility to pay executives proportionately, to pay other employees appropriately, to provide all their workers with a living wage, and to manage intra-firm inequality.
Top executives must accept that there are ethical restrictions on their right to receive and retain excessive income. They owe this to their companies, their peers, their colleagues, and to society as a whole.
Why did you choose LSE Press and open access publishing?
LSE Press has a unique business model, which I really like. Anyone can download research from the website without cost, meaning that research is open to everyone. At the same time those of us (like me!) who prefer to read hard copy books can purchase high quality paperbacks at very reasonable prices.
Alexander (‘Sandy’) Pepper is Emeritus Professor of Management Practice at the London School of Economics and Political Science, where he has been teaching and researching since 2008. His research and teaching interests include organisations and management theory, with a particular focus on the theory of the firm, corporate governance, and business ethics. Sandy is one of the UK’s recognised experts on executive pay. If You’re So Ethical, Why Are You So Highly Paid? is available to download for free from LSE Press at: https://doi.org/10.31389/lsepress/eth