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Fair Remuneration 30October 2020 TACKLING BOTH the TOP and BOTTOM of the INCOME PYRAMID

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Fair Remuneration 30October 2020 TACKLING BOTH the TOP and BOTTOM of the INCOME PYRAMID RESEARCH AND POLICY BRIEF Fair Remuneration 30October 2020 TACKLING BOTH THE TOP AND BOTTOM OF THE INCOME PYRAMID How are corporations performing in terms of sustainable development? This is what standards and practices related to “triple bottom line” or environmental, social and governance (ESG) reporting try to assess. But the current approach has a number of blind spots, rendering it impossible to gauge effectively whether corporations are working for or against a core dimension of inclusive and equitable development, namely distributive justice. Focusing on the issue of fair remuneration, this Brief highlights ways in which measurement and disclosure related to (i) income inequality within the firm and (ii) the adequacy of wages need to be repurposed if the transformative vision of the 2030 Agenda for Sustainable Development is to be realized. While the issue of fair remuneration has gained Table 1. CEO–worker pay ratio in the United States currency within corporate sustainability reporting, attention focuses primarily on the base of the income 1965 20 to 1 pyramid. But it is not only low or stagnant wages of 1989 58 to 1 workers but also the rapid rise in senior executive— 2000 386 to 1 notably C-suite—remuneration that accounts for the 2009 195 to 1 extreme levels of income and wealth inequality seen 278 to 1 since the 1990s. Far more attention needs to focus 2018 on the top of the pyramid. Source: Mishel and Wolfe 2019; CEO pay is calculated on the basis of the “stock options realized” method. 940% Increase in CEO pay 12% Increase in worker pay (Reich 2007) and a model of capitalism that was inherently anti-competitive, anti-democratic and not Source: Mishel and Wolfe 2019; 1978-2018 data for the largest conducive to productive investment or balanced and 350 firms in the United States. inclusive growth (see UNCTAD 2017, Piketty 2014, Stiglitz 2018). In a few countries, including the United Furthermore, reporting aimed at demonstrating the States, legislation called on publicly-traded companies adequacy of wages for lower-paid employees tends to to disclose their pay ratios. An obvious indicator for focus narrowly on the extent to which entry level or average wages comply with—or are above—minimum Box 1. Sustainable Development wage or industry norms. From the perspective of Performance Indicators Project (SDPI) norms related to sustainable development, the minimum wage benchmark amounts to a low UNRISD’s SDPI project (2018-2022) aims to bar. More attention also needs to be focused on contribute to the measurement and evaluation the payment of a wage that provides for a decent of the performance of economic entities—both in the for-profit sector and in the social and solidarity standard of living as defined by the concept of “the economy—in relation to the vision and goals of living wage”. the 2030 Agenda for Sustainable Development. The project will assess the adequacy of existing From the perspective of transformative change, then, methods and data associated with sustainability reporting on both income distribution within the firm accounting; expand the scope of sustainability measurement, disclosure and reporting beyond and the adequacy of wages are deficient. This Brief for-profit enterprises to encompass enterprise draws on findings in Accounting for Sustainability: models in the social and solidarity economy What Can and Should Corporations Be Doing? (Utting (SSE); identify and test a set of indicators that with O’Neill, forthcoming) to show what’s wrong and can effectively measure impacts, while ensuring that the economic behaviour of enterprises and what needs to change. other organizations contributes to maintaining environmental and social resources at the The CEO-worker pay ratio thresholds required for sustainable development. Phase 1 of the project, comprising both a state- Until fairly recently, the enrichment of corporate elites of-the-art review and preliminary guidance on key performance issues, indicators and targets, was tended to fly under the radar as an issue within corporate completed at the end of 2019, in view of a testing sustainability disclosure. This is now changing, not phase in 2020-2021. For more information, visit least in the wake of the global financial crisis of 2008-9 www.unrisd.org/sdpi. which spurred a wave of media attention and social The project is funded by the Center activism targeting the “1%”. The crisis also prompted for Entrepreneurship Studies, Republic considerable academic analysis that connected the of Korea. dots between the vast salaries of “supermanagers” Fair Remuneration: Tackling Both the Top and Bottom of the Income Pyramid Policy Brief 30 | October 2020 2 measuring income inequality within the firm is the Box 2. Pay ratios by Table 2. What is a fair pay ratio? pay ratio between employees at or near the bottom of country and region the income pyramid and the highest paid employee, General public 2–20 to 1* usually the CEO. Ratings or certification entities** 8–11 to 1 Pay ratios vary significantly Cooperative corporations (e.g. Mondragon) 9 to 1 by country, region or what Beyond the fact that many companies do not disclose State-owned enterprises 10–20 to 1*** are sometimes referred to as such data, there are two major concerns regarding Historical norms–1970s 20–30 to 1 “varieties of capitalism”. A pay ratio reporting and assessment. Firstly, the Progressive fiscal policy proposals Bloomberg ranking comparing way it is calculated is problematic, as methods for 30–50 to 1 (USA and Canada) CEO salaries to average per calculating CEO remuneration vary considerably. capita income* notes that five Often omitted are certain elements that make up * lowest and highest ideal ratio, based on a survey in 40 countries, including several the full compensation package. A comprehensive countries; see Kiatpongsan and Norton 2014; so-called “Anglo-American” ** refers to normative guidance adopted by certain economies, have ratios above definition—one used by the Economic Policy Institute organizations to assess positive performance; 200 to 1. This contrasts with (EPI)—includes not just base salary but also bonuses, *** regulatory norms in France, South Africa and China. the Nordic countries and restricted stock grants, long-term incentive payouts several Asian jurisdictions and stock options realized or options granted norms related to pay ratios might vary according (Hong Kong, Malaysia, (Sabadish and Mishel 2013). to different institutional and sectoral settings, this Singapore, Japan) which have exercise points to a target range of roughly 10–50 far lower ratios. Similarly, what CEO remuneration should be com- to 1, with a mid-point of about 30 to 1. Returning, pared to also varies. Most indicators focus on then, to the above question, from the perspective of South Africa 541 “other employees”—a category that also includes sustainable development a decline in the pay ratio to managers and senior executives, as opposed to 200 to 1 still means that the company in question India 483 simply “workers” or employees in lower income can in no way claim to have a fair pay ratio. brackets. The average pay of “other employees” may US 299 not bear a close relation to the wages of the lowest Towards a living wage paid workers. Accordingly, when calculating pay ratios, the EPI focuses more directly on “workers”, To assess progress toward distributive justice and UK 229 defining them as employees in production and non- sustainability, it is also important to improve reporting supervisory positions (Mishel and Wolfe 2019). on how adequate wages are. Greater attention has Canada 203 been paid to what global corporations disclose A further issue is whether companies report the about wages and overtime within their supply Switzerland 179 median or the mean average of “other employees’” chains since the anti-sweatshop movement of the pay, a choice which some standard-setting and ratings 1990s. But norms related to adequate wages have Germany 176 organizations leave to the reporting company. Given tended to focus on whether wages comply with or the wide range of staff that make up the category of exceed minimum wage or industry norms, or annual Spain 172 “other employees”, the median and mean average increases in real wages. can vary depending on the employment and pay Netherlands 172 structure of the company. The median—the mid-point Far less attention has been paid to the “the living of a set of values—is generally considered to reflect wage” as a normative benchmark. The defence of the Norway 101 more accurately the pay level of “typical” employees, minimum wage and gradual increases in real wages, notably in contexts of skewed distribution. while certainly important, constitute low-hanging fruit Denmark 82 in the challenge to achieve fair remuneration. A more The second concern relates to the lack of a normative meaningful norm, from the perspective of sustainable Sweden 75 target or benchmark against which to assess development, is the living wage. progress. What might a fair CEO-worker pay ratio be? Finland 61 What should we make of the fact that a corporation Drawing on over 60 different descriptions and defi- has reduced its CEO-worker pay ratio from, say, nitions, the Global Living Wage Coalition (GLWC) Hong Kong 66 300 to 1 down to 200 to 1? In incremental terms defines the living wage as: this seems significant but from the perspective of remuneration received for a standard work week by a Malaysia 66 assessing performance in relation to sustainable worker in a particular place sufficient to afford a decent development, is 200 to 1 a suitable pay ratio? Unless standard of living for the worker and her or his family. Singapore 65 we have an idea of what a fair allocation should be, it Elements of a decent standard of living include food, Japan 62 is not possible to assess sustainability performance water, housing, education, health care, transport, in any meaningful way.
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