It is not inequality that is an issue, but unfairness – a different focus in remuneration disclosures
04/07/2017
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Popular media is addicted to the click bait of executive pay. The media use the relatively large sums of money that CEOs earn to elicit comments regarding inequality. Many of the concerns are genuine, but others are driven by more base motives, including envy.

Yet, recent research published in the April issue of Nature Human Behaviour suggests that it is not inequality that upsets people. In fact, when people are asked about the ideal distribution of wealth in their country, they actually prefer unequal societies.

The research by Yale University Drs Starmans, Sheskin and Bloom suggests that the two phenomena of inequality and fairness can be reconciled. This is done by noticing, despite appearances to the contrary, there is no evidence that people are bothered by economic inequality itself. Rather, they are bothered by something that is often confounded with inequality: economic unfairness.

Drawing upon laboratory studies, cross-cultural research, and experiments with babies and young children, they argue that humans naturally favour fair distributions, not equal ones. When fairness and equality clash, people prefer fair inequality over unfair equality.

In a sense, the issue could be considered moot in Australia. This is because income and asset inequality has actually reduced since the GFC, despite widely held misconceptions reported in the media without factual substantiation (see the Reserve Bank’s analysis HERE).

Unfortunately, it is not moot, as all three proxy advisers and many local and overseas investors have explicitly expressed concern over the absolute levels of executive pay, aside from any fundamental issue with the fairness of how it was determined. On the basis of this research, perhaps they should reconsider their emphasis, and revert to assessments of fairness rather than a blunt assessment of income inequality.

ASX-listed company boards would benefit from more clearly distinguishing inequality from unfairness. That is, inequality among KMP executives arises from the size of businesses they are accountable for, and the results they achieve in running those businesses.

A board’s remuneration committee can robustly justify variations in pay outcomes by the fairness of the assessment process. They can do this by following a rigorous process for discerning the size factors that are valued by the market that explain variations in executive remuneration, and the actual performance of the executive in absolute and relative terms.

Yet a word count in remuneration reports shows that this emphasis is lacking. The word “competitive” in conjunction with pay, is often taken to mean that a company’s pay levels are high to attract and retain people. It is used much more than “fair” in conjunction with remuneration by over 100 to one. This suggests that the focus of remuneration reports, and of the committees that prepare them, could be misplaced.

The inequality and fairness research can be found HERE

© Guerdon Associates 2021
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