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Setting Limits: Ethical Thresholds to the CEO-Worker Pay A LIMIT TO THE CEO-WORKER PAY GAP 1 Setting Limits: Ethical Thresholds to the CEO-Worker Pay Gap Carmen Cervone1, Andrea Scatolon2, Michela Lenzi1 and Anne Maass1 1Department of Developmental Psychology and Socialization, University of Padua 2Department of Cognitive Sciences, University of Trento Main text word count: 9,700 words Author Note Carmen Cervone https://orcid.org/0000-0003-0057-0356 Andrea Scatolon https://orcid.org/0000-0002-8022-2046 Michela Lenzi https://orcid.org/0000-0001-7721-2448 Anne Maass https://orcid.org/0000-0001-9802-5246 Data are accessible at this link: https://osf.io/9uk2t. This research was supported by grant PRIN 2017 #2017924L2B of the Italian Ministry of Education, University and Research (MIUR), entitled “The psychology of economic inequality”, to the last author. We are grateful to Gerardo Cervone, who we consulted for identifying items used in the pretest of Study 2 and to Lucia Ronconi for her valuable insight on analyses of Study 2. The authors have no conflict of interest to declare. Correspondence concerning this article should be addressed to Carmen Cervone, Dipartimento di Psicologia dello Sviluppo e della Socializzazione, Università di Padova, Via Venezia 15, 35131 Padova, Italia. Email: [email protected] A LIMIT TO THE CEO-WORKER PAY GAP 2 Abstract In the discussion about wage inequality, principles of fairness and need for incentives are juxtaposed as opposing motivations for wage inequality acceptance. While previous literature focused on ideal inequality, in three correlational studies (Ntotal = 664) we tested the hypothesis of a threshold of inequality acceptance. Participants were asked to indicate what a CEO should earn, ideally (i.e., ideal pay gap) and at maximum (i.e., highest acceptable pay gap), given the wage of a worker. Results consistently showed that individuals indicated higher values for highest acceptable than for ideal pay gaps; Study 2 also provides evidence for a minimum degree of inequality that is deemed necessary. Additionally, across studies men preferred and tolerated greater wage inequality than women. In conclusion, these studies provide evidence for a threshold of inequality acceptance and pave the way for new research on the cognitive and motivational underpinnings of attitudes towards economic inequalities. Keywords: economic inequality, wage inequality, CEO-Worker pay gap, ideal pay gap, inequality threshold A LIMIT TO THE CEO-WORKER PAY GAP 3 Setting Limits: Ethical Thresholds to the CEO-Worker Pay Gap In the discussion about economic inequality it is often argued that the concentration of wealth at the very top of the social ladder is an essential incentive that encourages individuals to strive for success and make an extra effort in order to reach higher positions in society. At the same time, however, people universally hold principles of equity and fairness at a high value: since childhood, we are willing to reject distributions that are unfair either to ourselves or to others, even at our own cost (McAuliffe et al., 2017). Within this context, this paper aims to combine these two perspectives in a single framework, namely the range of tolerance of economic inequality, and specifically of wage inequality. Whether inequality is considered an incentive or unfair is particularly relevant in the area of the CEO-Worker Pay Gap Ratio (PGR, i.e., the ratio between the wage of a CEO and a worker of the same company), as this debate holds tangible consequences on organizational policies and individual wages. Organizational models rely on two competing theories, i.e., the tournament theory and the equity and fairness theory. The tournament model (Lazear & Rosen, 1981) posits that high wage dispersion leads to greater efficiency and productivity in organizations, as workers are motivated to reach higher positions (for a comprehensive review, see Connelly et al., 2014). Consistent with this theory, greater differences in pay were shown to be positively linked to performance (Lallemand et al., 2004). On the contrary, the equity model states that high wage inequality leads to decreased productivity, as workers perceive the organization as unfair and are less motivated to make an effort. Consistent with this notion, high pay dispersions are linked to employees’ negative perception of the company (Benedetti & Chen, 2018), diminished perception of leaders’ efficacy and charisma (Peters et al., 2019), lower integration and poorer performance of top executives (Ou et al., 2018), and higher likelihood of fraud (Haß et al., 2015). Wage inequality appears to be relevant not only A LIMIT TO THE CEO-WORKER PAY GAP 4 for the organizational environment, but also in shaping consumer behaviour: high pay gaps are linked to reduced purchasing intention (Mohan et al., 2018), and to a negative opinion of the company (Benedetti & Chen, 2018). The tournament theory and the equity and fairness theory have often been juxtaposed by organizational research, but rarely combined. We suggest, instead, that both notions (inequality as an incentive and inequality as unfair) may coexist in a single framework, with individuals believing that inequality is good as long as it falls within a certain range. We propose that individuals do feel the need for hierarchical economic structures in organizational contexts; however, they also have a limit to what they believe is fair. This might result in a curve in which the turning point is represented by one’s threshold of tolerance for inequality, the “ethical ceiling” mentioned by Osberg and Smeeding (2006). Consistent with our prediction, within social psychology, research on economic inequality has produced consistent evidence that individuals prefer wealth distributions that are more equal than the current ones, but that still show some degree of inequality (Norton & Ariely, 2013; Norton et al., 2014; Osberg & Smeeding, 2006). Even for pay gaps, across the world people seem to agree that a certain level of inequality (which is lower than what they perceive the actual pay gap to be) is ideal, although large cross-cultural differences in the “amount of inequality” exist (e.g. Kiatpongsan & Norton, 2014; Osberg & Smeeding, 2006; Pedersen & Mutz, 2019). Kiatpongsan and Norton (2014), for example, found that in 2009 the average ideal PGR across 40 countries was 4.6, with national averages ranging from 2 (Denmark) to 20 (Taiwan). Nonetheless, to our knowledge research on economic inequality and PGRs has yet to explore whether there is a limit to the inequality that individuals deem ethically acceptable, i.e., the highest acceptable pay gap. Osberg and Smeeding (2006), for example, conceptualise the “ethical ceiling” as the ideal PGR, with the assumption that ideal ratios are the threshold A LIMIT TO THE CEO-WORKER PAY GAP 5 for acceptable inequality. We argue instead that these are two different concepts, as individuals have a tolerance for inequality (i.e., the inequality they are willing to accept) that goes beyond their preference. Hence, the primary, overarching aim of this research was to investigate whether and where people would set the limits for CEO-worker pay gaps. A Threshold to Wage Inequality: The Highest Acceptable Pay Gap The idea of a maximum acceptable wealth or pay gap is by no means new. Plato, in Book 5 of The Laws, discusses the ethical underpinnings of wealth distribution, making very precise policy recommendations for a hypothetical city state. To avoid hatred and divisions among individuals, he suggests prohibiting excessive accumulation of wealth and to distribute land and houses across four social classes. In his ideal society, each man is guaranteed the possession of one lot (the minimum) whereas the maximum is set to four times this amount: “Let the limit of poverty be the value of a lot […] This the legislator will permit a man to acquire double or triple, or as much as four times the amount of this” (Plato, 348 BC, p. 112). Thus, Plato is more concerned about defining the maximum acceptable wealth gap than to discuss the ideal distribution, which, according to his opinion, is far below the 1:4 rule. In advanced social democracies, the maximum pay gap is generally defined by two interrelated rules, concerning minimum wage and executive salaries, respectively. Since executive compensation includes not only salaries but also different forms of non-salary benefits (bonuses, stock options, tax deductions and the like), maximum wage regulations generally are based on two approaches: caps on remuneration and/or performance-related pay policies (for an overview see Bruni, 2017). According to Bruni, 11 EU member states have implemented a binding cap policy in the public and/or semi-public sectors, whereas 17 states have performance-related pay regulations. Given that laws generally define thresholds rather than ideals, from an applied point of view setting limits to remuneration seems much more A LIMIT TO THE CEO-WORKER PAY GAP 6 relevant than defining ideal levels of inequality. Since these regulations are already present in some (albeit few) countries, the highest acceptable PGR may be envisaged as more realistic, than an ideal PGR, which can hardly assume a concrete form or be transformed into a tangible policy. Since the highest acceptable PGR can actually be implemented in the form of maximum and minimum wage laws, exploring the individual and contextual determinants of people’s threshold for wage inequality might prove more consequential for the political and social landscape than individual preferences or ideals. Although we do not explore this issue here, the highest acceptable PGR can also be interesting from a psychological point of view. Since the threshold can be considered a personal norm, one may predict that a violation of this norm (i.e., higher inequality) may be perceived as more illegitimate than the violation of one’s ideal, thus possibly leading to greater anger and willingness to engage in collective action to reduce inequality. This may be especially true when inequality beyond the threshold is perceived as unethical, i.e., as a moral violation.
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