Business Ethics: A European Review Volume 21 Number 1 January 2012

Justice in compensation: a defense

Jeffrey Moriarty
Bentley University, Waltham, MA, USA

Business ethicists have written much about ethical issues in employment. Except for a handful of articles on the very high pay of chief executive ofcers and the very low pay of workers in overseas sweatshops, however, little has been written about the ethics of compensation. This is prima facie strange. Workers care about their pay, and they think about it in normative terms. This articles purpose is to consider whether business ethicists neglect of the normative aspects of compensation is justied. I examine several possible justications for neglecting compensation and show that they fail. What remains is a case for thinking that it is worthy of normative analysis.

Introduction
Business ethicists have written much about ethical issues in employment. Except for a handful of articles on the very high pay of chief executive ofcers (CEOs) (Carr & Valinezhad 1994, Rodgers & Gago 2003, McCall 2004, Boatright 2010) and the very low pay of workers in overseas sweatshops (Maitland 1997, Arnold & Bowie 2003, Zwolinski 2007), however, little has been written about the ethics of compensation (cf. Bloom 2004). Werhane et al.s (2004) survey of employment ethics is a case in point. They devote entire chapters to classic issues such as job security, workplace democracy, and afrmative action, but only a few pages to compensation. This is prima facie strange. Workers care about their pay (Gerhart & Rynes 2003), and they think about it in normative terms, i.e., as just or unjust, fair or unfair, equitable or inequitable, and so on (Kahneman et al. 1986, Konow 2003, Greenberg & Colquitt 2005). This articles purpose is to examine whether business ethicists relative neglect of the normative aspects of compensation is justied. I am concerned with compensation in general, not just at the extreme high and low ends of the pay scale. I examine several possible justications for neglecting compensation
doi: 10.1111/j.1467-8608.2011.01641.x

and show that they fail. What remains is a case for thinking that it is worthy of normative analysis. My inquiry proceeds on an objective level. That is, I consider whether good reasons for neglecting compensation as a subject of normative inquiry exist, not what actually motivates its neglect. I do not, however, try to assess the relative importance of pay to other issues in employment ethics. So, I do not claim that pay is more worthy of normative inquiry than any other topic, just that it is worthy. Moreover, I do not offer a theory of justice in compensation. This project is enormously important, but also enormously complex. I indicate what the next logical steps in this inquiry are, but carrying them out must be left for another indeed many other studies. My goal is to motivate, by clearing away objections to, such studies. Before beginning, let me clarify my terminology. I use the terms wages, pay, and compensation interchangeably. While wages and pay are synonymous, a persons total compensation can include other benets, such as health care and retirement programs, or the use of company property. But these other benets can be understood, like wages, as a payment made to the employee for his or her work. So, for my purposes, the distinction between these

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concepts is irrelevant. Second, I frame my inquiry in terms of what justice requires with respect to wages. But I do not mean to limit its scope to ideals (e.g. equality, desert) or devices (e.g. the social contract) usually associated with the concept of justice. I am interested generally in what the morally justiable, ethical, fair, or equitable wage is (cf. Konow 2003). I use justice in this context for two reasons. First, this term is often employed in the few existing discussions of the normative aspects of wages (cf. Boatright 2010). Second, and relatedly, the problem of wage determination seems legitimately described as a problem of justice, in the traditional philosophical sense. This is because it arises out of what philosophers call the circumstances of justice, viz. circumstances in which people of limited altruism make competing claims on a nite set of resources (Hume 1983, Rawls 1999). It is likely that workers desires for compensation, taken collectively, exceed what rms can pay them. Thus, a theory of how rms should, from a moral point of view, compensate their employees can be described as a theory of justice in compensation.

Objections forestalled
My claim that pay has been neglected may seem wrong. Social scientists have generated a vast literature on compensation (Gerhart & Rynes 2003, Guthrie 2007). It is a staple of the business school curriculum; as a result, textbooks are devoted to the subject (Henderson 2006, Milkovich et al. 2008, Martocchio 2009). A multibillion dollar industry, led by rms such as Mercer, Towers Perrin, and the Hay Group, helps rms design effective compensation schemes. This work, however, does not address the normative aspects of compensation. The guiding question in the social scientic literature on pay, in business schools, and for compensation consultants is how are compensation schemes most efciently designed to promote organizational goals? The efciency of a compensation package or policy does not guarantee its justice. What about the growing body of work on organizational justice? This subject treats a variety of organizational actions, processes, and outcomes,

including those involving compensation. Theorists have focused on three types of justice: interactional, which concerns the justice of interpersonal exchanges (especially between workers and supervisors); procedural, which concerns the justice of the processes rms use to arrive at decisions; and distributive, which concerns the justice of the resulting outcomes (Greenberg & Colquitt 2005). Compensation can be evaluated using all of these constructs. Economists, too, have become increasingly interested in the concepts of justice and fairness. Konow notes that [j]ustice arguments are now widely invoked to improve theoretical and empirical analysis in nearly every eld of economics, including wage determination (2003: 1188). These inquiries are of limited relevance to the study of compensations normative aspects, however, for they are descriptive as opposed to normative in nature. Economists tend to be interested in justice and fairness as a motive for peoples actions (Fehr & Schmidt 1999). As a result, they are concerned with what people actually think is fair (Kahneman et al. 1986, Konow 2003). Similarly, organizational justice theorists focus on justice not as it should be, but as it is perceived by individuals (Greenberg & Colquitt 2005: 4). Normative theorists cannot ignore peoples perceptions of justice, but their inquiries do not stop here.1 They use philosophical analysis to determine whether what people think is right is in fact right. Below I present four reasons for thinking that compensation is not worthy of normative analysis. As much as possible, I draw on existing literature. In some cases, I identify what I think are popular but tacit reasons for holding this view. The reasons I consider are not incompatible, but each expresses a distinct view meriting separate consideration. I answer each in turn, and conclude by mapping out directions for future research.

Reason 1: rms are wage takers

According to Reason 1, compensation is not worthy of normative inquiry because rms have no real power to change what they pay their workers. Neoclassical economic theory says that each rm is a wage taker, not a wage maker, in a competitive market (Krugman & Wells 2009). Workers wages

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are set in the market by the aggregate forces of supply and demand.2 If a rm pays less than the market rate, it will be unable to attract (talented) workers. If it pays more, it will incur unnecessary costs. Both put the rm at a competitive disadvantage which will, other things equal, drive it out of business in the long run. So rms must pay the market rate. If, as is commonly believed, ought implies can, then cannot implies not-ought. If rms ought to take moral considerations into account in determining what to pay their employees, then they can do so. According to Reason 1, they cannot: Firms must pay the market rate if they are to stay in business in the long run. So it is not the case that they ought to take moral considerations into account.

Reply
In reply, we might question the force of the must in Reason 1s claim that rms must pay the market rate. Firms must pay the market rate, according to this Reason, if they are to stay in business in the long run. But pursuit of the goal of staying in business does not give a rm a license to do anything it wants. A rm would not be justied in bribing government ofcials to win lucrative contracts, or dumping toxic waste into a communitys water supply, even if these were necessary for its survival. Similarly, a rm may not be justied in paying the market rate to (some) employees, even if this were necessary for its survival. The force of this reply is limited. In certain cases, it might be better for a rm to go under than to stay in business if a condition of its staying in business is paying deeply unjust wages. However, it would clearly be bad for all or even many rms to go out of business because they refuse to pay market wages. So the evil of paying an unjust wage must be weighed against and sometimes lose out to the evil of going out of business, given all the losses this entails. A second and better response to Reason 1 is to observe that paying more or less than the market rate for labor does not put a rm at a competitive disadvantage if other rms in the economy do the same. Suppose, for example, the market rate for unskilled labor is X, but all rms voluntarily agree to pay X + N, or the state mandates a minimum wage rate of X + N, then no rm is at a competitive disadvan-

tage with respect to any other rm (in that economy) if it pays its unskilled workers X + N. (I address possible difculties with these options later.)3 A third and best reply to Reason 1 takes on its central claim, viz. that rms are wage takers who have no real power to alter workers wages. While this may be true in theory, given certain simplifying assumptions, it is false in reality, to judge by actual rms compensation practices. There are signicant and persistent differences in pay among workers who, neoclassical economic theory predicts, will earn similar wages, i.e., workers who have similar amounts of human capital, and thus who are likely to be similarly productive (Gerhart & Milkovich 1990, Idson & Oi 1999, Mortensen 2003). A wellknown example of this phenomenon called wage dispersion by economists is found in the pay practices of discount retail giants Sams Club and Costco. The average Sams Club employee is paid $10.11 per hour, while the average Costco employee is paid $17.00 per hour (Cascio 2006).4 Economists have devoted considerable effort to explaining wage dispersion. One popular explanation appeals to frictions in the labor market, such as information asymmetries and transaction costs. A job seeker will not know what every available job pays and will not be able to switch jobs easily should he or she nd one that pays more than his or her current job (Montgomery 1991, Mortensen 2003). Another explanation appeals to efciency wages. On this account, some rms pay above-market wages to reduce costs associated with shirking and turnover (Akerlof & Yellen 1986, Weiss 1990). Note that these are not explanations of why certain rms must pay above or below the market rate, as determined by what workers would receive in a perfectly competitive market at equilibrium. Instead, they are explanations of why rms can survive in the long run despite their not paying this rate. While, as the Sams Club/Costco case shows, wage dispersion can be substantial, it is not boundless. A large nancial services rm cannot expect to survive long if it refuses to pay more than $10,000 per year to its CEO. The same is true for any rm that pays its janitors $1,000,000 per year. But the existence of wage dispersion suggests that rms have space to maneuver within the boundaries set by market forces without threatening their long-term survival. Thus,

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they have space to adjust their pay practices in response to moral considerations. This lesson from the study of wage dispersion is a fundamental assumption of compensation textbooks. These books outline many ways rms can pay their employees; the assumption is that they can choose, within limits, how to do so. If rms could only take the market wage, there would be little left to choose (Gerhart & Rynes 2003). If, as is widely believed, they can, there is.5

Reply
I do not deny that the overall distribution of wealth in society is an important moral issue. My claim is simply that, in addition, how much people are paid by their employers matters. Now it might be tempting to argue that compensation matters just because wealth matters. For how much wealth people have depends, often in large part, on how much they are paid for their work. While this is correct, it is unsatisfactory as a reply to Reason 2. It gives us no reason to consider wages apart from their effect on wealth, and this is what is needed to defeat it. To see why Reason 2 is awed, we must consider its central, but implicit, assumption: that all wealth is fungible. That is, Reason 2 assumes that the money a person gets from one source (e.g. an employer, as a wage) is interchangeable with money one gets from any other source (e.g. the state, in the form of a wealth transfer). In one way, this is surely right. When I purchase groceries, the store does not care what the source of my money is, provided it is acquired legally. In another way, however, this claim is wrong: It matters, in at least some cases, where ones wealth comes from. Consider the following simple example. Suppose P enters an essay contest for which the prize for writing the best essay is $500. By any reasonable standard, Ps essay is best, but because the judges on the prize committee have been corrupted by lavish gifts from Qs relatives, Q is given the prize. Now, suppose a benevolent stranger is so moved by Ps plight that she decides to pay him $500. She would not have given P this money had P won the contest. For in that case she would not have been moved by Ps situation. Note that, whether or not P is awarded the prize, the outcome for P is the same: Having written the best essay, he is now $500 richer. But the situations do not seem morally the same. Intuitively, it matters whether P receives the money from the prize committee or from a benevolent stranger. The reason is that, when the prize committee does not award the prize to P, it treats him wrongly or unjustly. Ps receiving $500 from the benevolent stranger may ameliorate the sting he feels, and it improves the situation from a moral point of view. But it does not

Reason 2: what matters is wealth

According to Reason 2 to ignore the normative aspects of wages, what matters is overall wealth. Insofar as we care about a persons pay, the argument goes, we care only about the contribution it makes to how much wealth the person has. But wages are only a part of wealth. A persons wealth is also a function of what others give him or her, what services his or her government provides, and how much tax he or she pays. Thus, it might be said, the focus on wages is too narrow: We should focus our normative inquiries on the justice of the whole, viz. the overall distribution of wealth in society, not on the justice of the part, viz. how much workers are paid. Elster (1992) appears to support this view. He denies that wage determination by rms [is] a problem of local justice because wages enter indirectly into the global redistributive system, through comprehensive schemes of collective bargaining, progressive taxation, pension schemes, and the like (1992: 4). Elsters point seems to be that wages are not an issue of local justice because wages are not goods specic to institutions like places in universities and transplant organs. They are simply a form of wealth, which comes from many sources. Bowie and Werhane also hint at this view when they say that business has a very limited, if any, moral obligation with respect to wages, and that if any institution has an obligation in [this] area, it is government (2005: 48). For example, they say low pay may not be a moral issue with a sufciently high negative income tax (2005: 48). Bowie and Werhane imply that what matters is how much wealth people have, so that if the state ensures that people have enough, then how much they are paid is relatively unimportant.6

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eliminate the wrongness of the prize committees having given the prize to Q. What can we learn from this case about compensation? The key question is: Is paying (or not paying) a wage to a person, like awarding (or not awarding) him or her a prize, a way of treating him or her that can be assessed normatively? The answer, I suggest, is yes. Of course, different theorists may have different ideas about what justice in wages requires. But it seems clear that, for every theorist, there will be some wage that qualies as just or unjust. Consider another simple example. Suppose P and Q agree to work for E for a week, mowing lawns and doing other yard work around Es property, for $500 each. P and Q complete the week of work, doing an equally good job, and E pays Q $500. But instead of paying P, E skips town, never to be seen again. Feeling sorry for himself, P goes to a convenience store to console himself with a candy bar. It turns out that P is the stores 1,000,000th customer. To mark the occasion, the store gives P $500 as a gift. Suppose P would not have received the $500 from the store had E paid him. For in that case, P would not have gone there to console himself with a candy bar. In this case also, whether or not E pays P, the outcome for both P and Q is the same: Having performed a weeks worth of work for E, P and Q are now $500 richer. But the situations do not seem morally the same. Intuitively, it matters where Ps money comes from: E or the store. The situation is no different if, instead of Ps receiving $500 from the store, he receives it from a government program designed to compensate employees whose employers fail to pay them. This intuition can be explained in the same way we explained the analogous intuition in the essay contest. E treats P unjustly when he fails to pay P $500. Ps receiving the $500 from another source may make him feel better, and it improves the situation from a moral point of view. But it does not erase the injustice of Es treatment of P. The general lesson is that paying an employee a wage is a way of treating them, and this treatment can be assessed morally. It can be a promise kept or a promise broken. It can betray a lack of respect for the workers and their contributions, or it can respect them (Arnold & Bowie 2003). It can make workers happy or sad, and increase or decrease their self-

esteem. It follows that compensation matters, not just wealth. Reason 2 for ignoring the normative dimensions of compensation fails.

Reason 3: agreement about justice in compensation

I have argued that employers can be sensitive to considerations of justice in determining what to pay their employees. I have also said that they should be because wages can be just or unjust. It might next be said that there is only one consideration that matters, viz. what the parties involved have agreed to. (Perhaps the most obvious source of injustice in the earlier case is Es failure to pay P what he agreed to pay him.) More precisely, one might claim that a just wage is whatever wage the employer and employee agree to without force or fraud. And, one might go on, there can be no real disagreement about this standard for justice in wages. A version of this view is found in Machan & Chesher (2002). According to them, a just or fair wage would be one that each side agrees to, so long as there is no misrepresentation, fraud, or coercion (2002: 89). Anyone who rejects this view, they go on, is not merely wrong but confused: a fair wage, understood as anything other than the wage freely agreed to, is a conceptual error (2002: 88). In other words, we arrive at the truth of this view of justice in wages merely by understanding the concept of fairness and basic facts about wages. Unlike Machan & Chesher, who accord it the status of a conceptual truth, Boatright suggests that this view of justice in wages follows from an acceptance of free-market capitalism, which in turn is justied by many different theories [of distributive justice] (2010: 175). In a capitalist economic system, he argues that we have a right to transact with others so as to exchange our property rights to a thing in return for something that we value more (2010: 172). The resulting distribution of property rights can be considered just precisely because it results from a free-market exchange (2010: 172). This applies as much to things as it does to labor. That is, we have a right to exchange some of our labor for some of anothers money, and the just price for it, or wage, is whatever . . . an employer is willing

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to offer and the worker is willing to accept (2010: 172). Boatright describes this as the commonsense or intuitive view that most people who endorse capitalism accept about justice in wages (2010: 171). Elsewhere, he calls it a central or essential part of capitalism (2010: 175). So Boatright implies that if we are capitalists, as opposed to proponents of a command economy, then we must accept this view of justice in wages.7 Reason 3 to neglect the normative aspects of compensation, then, is that there is widespread agreement about what justice requires with respect to compensation, viz. it requires nothing more than that employers pay employees what they have agreed, without force or fraud, to pay them. The views truth, according to Reason 3, follows from widely accepted principles or commitments. Acceptance of the view of justice in wages articulated in Reason 3 may also help explain why those few who have written on this subject have focused on the compensation of corporate executives and workers in overseas sweatshops. For in these cases, this views force condition is arguably violated. Much of the debate about executive pay has focused on the managerial power thesis, that is, the claim that executives use their power over boards to extract large rents from rms (Bebchuk & Fried 2004, Boatright 2010). Debates about sweatshop worker pay have focused on whether the voluntariness of their employment agreements is undermined by their lack of acceptable options (Zwolinski 2007). Some of the participants in these debates may believe that, provided the agreements between employers and employees are voluntary, then assuming that they are also non-fraudulent, there is no injustice.8

Reply
It seems false, as a matter of fact, that this view of justice in compensation is widely accepted by the public. The United States, for example, has a variety of laws that limit the compensation agreements that employers and employees can enter into. These include minimum wage laws, the Equal Pay Act and Title VII of the Civil Rights Act. So, for example, an employer and employee cannot enter into a compensation agreement in which the employee gets paid less than a certain wage, or more than a coworker of

another race or sex who performs the same job (barring differences in merit, seniority, or other factors). It seems likely that part of the motivation for these laws is the intuition that it is unjust for employees to be paid less than a certain wage, or to be discriminated against on the basis of their race or sex. If Machan & Chesher, and Boatright accept that justice requires, or could require, such laws, then they will have conceded that a just wage is not necessarily whatever wage is agreed to by employers and employees without force of fraud, and that research on the normative dimensions of wages is valuable. We might think that employers and employees should be able to strike whatever bargains they want within the bounds of the law. But in this case, research on the normative aspects of wages would be useful for determining what those bounds should be. A Reason 3 supporter might deny, however, that justice requires these laws. Moreover, he or she might claim that the fact that some members of the public would disagree is irrelevant. Our question is whether there are good reasons to consider the question of justice in wages settled. There might be good reasons to think this reasons scholars perceive even if the public thinks otherwise. But it would be surprising if there were. The view of justice in wages under consideration is straightforwardly libertarian. Some writers, including Maitland (1989) and Machan (1987), take a libertarian approach to many aspects of the work environment (and other issues in business ethics). For them, there is no amount of job security, meaningful work, or safety (etc.) that an employee should have other than the amount that he or she and his or her employer agree, without force or fraud, that he will have. Naturally, a libertarian will take this approach to compensation too. But why suppose that we all should be libertarians about compensation? As seen, Machan & Chesher accord this view the status of a conceptual truth. To think that a fair wage is anything other than [a] wage freely agreed to, they say, is to make a conceptual error (2002: 88). This is implausible. Although moral concepts, like many concepts, are vague at the edges, some uses of them are clearly wrong. If I described a situation in which one person enslaved another, then tortured

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and killed him, as fair or just, my understanding of fair and just would be suspect. But it is implausible to suppose that a person who claims that it is unfair or unjust for a migrant farm worker to be paid less than $30 per day, even if he or she freely accepts it, is confused about the meaning of fairness or justice. The same goes for a person who thinks that it is unfair or unjust for a woman to be paid less than a man for doing the same work equally well, even if they both agree to their pay. These persons simply have different views about what fairness or justice requires than Machan & Chesher. If they are making an error, it is a normative, not a conceptual one. Machan & Chesher need normative arguments to establish their view of justice in compensation; they cannot rely on conceptual analysis alone. Machan & Chesher might reply that they do have normative arguments to justify their view. They might, for example, appeal to Nozicks (1974) defense of his libertarian theory of justice, which seems to entail it. But this is to join the debate that I have said business ethicists have ignored. This is not the place to decide it. My goal is merely to show that it is worth having. Boatright arrives at the libertarian view of justice in compensation through a consideration of capitalisms implications. He says that, in a capitalist economic system, a worker has a right to whatever . . . she gains by exchanging his or her property through voluntary transactions (2010: 190). Her pay is just [when and] because it results from a free-market exchange (2010: 172). This argument, while prima facie more plausible than Machan & Cheshers, also fails. One obvious way to attack it is to question the justication of capitalism. If capitalism is unjustied, then it cannot provide support for the libertarian view of wages that Boatright suggests it does. I will not pursue this objection here. For it seems clear that capitalism, understood broadly to include the private ownership of the means of production and the use of markets to allocate and price goods, is preferable to a command economy. Instead, I will argue that support for capitalism, understood this way, does not entail libertarianism about compensation. Recall rst that the United States is an apparently capitalist economy in which it is not the case that employees have a right to whatever [they] gain from

voluntary transactions. Employees are forbidden from receiving wages in violation of minimum wage laws, the Equal Pay Act and Title VII of the Civil Rights Act. It might be objected that these restrictions are a deviation from capitalism, and that a society truly committed to capitalisms principles would not have them. But carrying this counterargument to its natural conclusion yields a dilemma for the objector: either capitalism is not, after all, widely accepted or it does not entail libertarianism about wages. Consider again other aspects of the work environment, such as the meaningfulness of work, job security, and safety conditions. Workers weigh these factors alongside pay in determining which jobs to accept. Because they are exchanged by employers along with pay for the employees labor, they are, in a sense, part of labors price. So the version of capitalism that entails libertarianism about wages also seems to entail libertarianism about these aspects of work. That is, it seems to entail that all normative questions about the meaningfulness of work, job security, and safety conditions can be answered by appealing to the content and character of the agreements, or lack thereof, between employers and employees. In fact, the implications of this argument go further still. Labor is not the only thing that is exchanged for a price in a capitalist economic system. Firms sell the goods and services they produce to each other and to consumers. Investors sell capital to rms in exchange for control rights. If capitalism entails libertarianism about wages on the grounds that people have rights to exchange with others what they own, then it entails libertarianism about all other exchanges in the market on the same grounds. It entails that all questions about the justice of product safety, international trade, and capital markets can be answered by appealing to the content and character of the agreements, or lack thereof, between buyers and sellers. Some may endorse this austere version of capitalism. I do not claim that they are wrong. I claim only that it is implausible to suppose that their view is widely accepted, so that libertarianism about compensation follows from a view we all accept. The version of capitalism that is widely accepted is compatible with government regulation of the market. On this less austere version, one can be a capitalist,

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and argue that justice requires certain minimum health and safety standards, even if workers would (and do) agree to work in environments that do not meet them (Arnold & Bowie 2003). One can be a capitalist and argue that insider trading is wrong, even when it occurs between free and informed buyers and sellers (Moore 1990). This point seems to be conceded by libertarians themselves. They do not claim that those who disagree with their views about workplace justice are not capitalists. They claim that their opponents views violate rights or have bad consequences (Maitland 1989, 1997). In light of this, it seems arbitrary to claim that, if one is a capitalist, one must believe that any compensation agreement made by employers and employees without force or fraud is just.9 Because capitalism is consistent with a non-libertarian standard of justice in compensation, Boatrights argument fails. At this point, one might wonder, if we arent libertarians about compensation, what should we be? There are many options. First, we might prioritize desert. That is, we might think that the just wage is the wage a person deserves, as determined by his or her contribution to the rm. A persons contribution to the rm, in turn, may be determined in part by his or her human capital, i.e., his or her talents and skills (Becker 1975, Gerhart & Rynes 2003). Sternberg (2000) defends a view of this sort in one of the few existing normative analyses of wages. Second, we might prioritize utility. We might say that a just wage is one that maximizes rm value by attracting, retaining, and motivating employees. What compensation system maximizes rm value depends on empirical factors, and so may vary from rm to rm. When it is easy to isolate the value of each workers contribution, it may be most efcient to pay them an amount of money equal to the value of their contributions (Frank 1984). When doing so is costly, it may be more efcient to structure compensation systems as rank-order tournaments, with very large prizes going to the winners (Lazear & Rosen 1981). Thus, desert and utility may recommend the same compensation policy or different ones. A theory of justice in compensation may also include a role for other values, such as benecence and respect (Audi 2008). Research on the normative aspects of pay, then, should not be limited either by the belief that there can be no doubt about what the right theory of

justice in compensation is, or by the lack of conceivable alternatives.

Reason 4: a tax and transfer scheme is the best feasible result

Moral disputes are not easily solved; debates about compensation are likely to be no more tractable. But suppose there is agreement that the wages of certain workers are unjust. What can be done? There seem to be two main options. The rst is persuasion: workers or others (e.g. unions, consumers, or public interest groups) could try to persuade employers to adjust those workers wages. The second is regulation: society could enact laws requiring employers to adjust them. Reason 4 claims that neither option is promising. Persuasion, it might be said, will not work: Firms will not listen, especially if the complaint is that certain workers should be paid more. Listening puts them at a disadvantage relative to their competitors who may not listen. Regulation promises to level the playing eld, but at a potentially high cost to society. Neoclassical economic theory predicts that price controls, including ceilings and oors, will lead to a variety of signicant inefciencies (Krugman & Wells 2009). Floors will lead to excess supply, while ceilings will lead to shortages. Both create deadweight losses. On this argument, because a wage is the price of labor, wages should not be controlled by the state. A more efcient result is obtained when wages, like all other prices, are set in the market. Because neither option is promising, Reason 4 continues, we should instead adjust peoples wealth levels using a tax and transfer scheme. So if we think X is paid too much and Y is paid too little, then we should tax Xs earnings and transfer the money to Y, either directly or through social programs that benet Y. In view of the argument against Reason 2, we will not say that this is the ideal result, for the injustice of getting paid too much or too little will not be erased. (X may not feel wronged when he is paid too much but it may still be unjust.) We will say, rather, that it is the best feasible result: Adjusting wealth ameliorates the injustice.

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Reply
The worries expressed in Reason 4 are, to an extent, premature. Until we conduct research on the normative aspects of wages, we will not know what changes should be made to peoples wages, and how difcult or costly those changes will be. Nevertheless, unless we understand an inquiry into the normative aspects of wages to be purely academic, it is useful to try to head off these worries. The rst worry is that persuasion may be ineffective because rms may not listen. Against this, while it may be nave to think that rms will jump at the chance to do what is right with respect to compensation, it is pessimistic to think that they will refuse to do so unless they are compelled by law. Many rms engage in morally commendable action in the absence of legal compulsion. Xerox pays some its workers to volunteer for a year in their communities; Green Mountain Coffee Roasters pays its coffee bean suppliers fair trade prices (Carroll 2008); corporations in general donate billions of dollars every year to charitable organizations (Businessweek 2007). Perhaps more importantly, rms whose actions were criticized have made efforts to improve. In response to claims that they used sweatshop labor, apparel and footwear rms Nike and Reebok adopted codes of conduct for their overseas suppliers (Maitland 1997). Wal-Mart, long a target of environmentalists, has taken steps to green its business operations (Pfeffer 2010). Indeed, the story of the corporate social responsibility movement over the past three decades can be seen as one of a gradual acceptance by rms that they have social obligations. Now, some rms may have been persuaded to change their ways by rational arguments, while others may have been persuaded by bad publicity, boycott threats, or the belief that being socially responsible would benet them nancially (Orlitzky et al. 2003). It does not matter for my argument why rms altered their behavior, just that they did, and in the absence of legal compulsion. What has worked for social responsibility may work, I suggest, for compensation. If persuasion does not work, we may try regulation. Reason 4 claims, in response, that regulating wages, like regulating all prices, creates economic inefciencies. Instead of challenging this claim directly, I will try to undermine its signicance. I

focus on the United States, but similar examples can be drawn from elsewhere. I begin with the observation that instituting strict wage oors and ceilings is not the only way of regulating wages. Recently, there has been discussion of requiring the Federal Reserve to approve bank executives compensation packages to ensure that they are not structured in a way that encourages excessive risk taking (Paletta & Hilsenrath 2009). Firms compensation policies can also be inuenced through the tax code. At present, rms are forbidden from deducting on their income statements non-performance-based compensation in excess of $1,000,000, and are required to expense stock options. The former incentivizes rms to compensate their employees with performance-based pay, while the latter disincentivizes them from using stock options as the vehicle. While these measures target the pay of high earners, the pay of low earners can be similarly inuenced. For example, tax penalties can be imposed on rms that pay full-time workers less than a certain minimum wage.10 It might be objected that regulations such as these have some of the same features as binding price controls. Like price controls, they have the effect of setting the price of labor above or below marketclearing levels. When this happens, the argument goes, inefciency is the inevitable result. This brings me to my second observation: Our current economic practice includes price controls. Farmers are guaranteed price oors on commodities such as corn, cotton, and wheat. The Robinson Patman Act of 1936 forbids certain forms of price discrimination, that is, selling the same type and quantity of a good at a similar time to different people at different prices. And the majority of US states forbid price gouging, understood as charging an excessive amount for a necessary good in an emergency (Zwolinski 2008). Furthermore, current economic practice includes price controls on labor. The best known examples are the federal and state minimum wage laws. Also, as noted, the Equal Pay Act of 1963 forbids employers from paying one worker more than another worker of a different race or sex who performs the same job, barring differences in merit, seniority, or other relevant factors. Some will reply to these policies: so much the worse for our current economic practice (Marcoux

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2006, Zwolinski 2008). However, if we judge by their long establishment in law, society accepts them as legitimate. This may be either because we deny that all price controls are inefcient, or more likely, because we are willing to accept some inefciency for the sake of doing what we think is right. We may think it is important as a nation to be able to produce our own food, and wrong for workers to be paid wages so low that they cannot support themselves. This is not the place to decide whether these are wise policies all things considered. I have said enough to make my point. That is, (further) regulation of wages should not be dismissed out of hand simply because such regulation is a way of controlling prices. Wage regulations are no more intrinsically undesirable than other forms of price controls, some of which we accept. This is not to say that a society can expect to set the price of labor far from market-clearing levels without serious economic consequences. Both economic theory and past experience suggest that drastic price controls create inefciencies that societies are unwilling to accept. The United States, for example, is unlikely to want to repeat its experience with price controls on oil in the 1970s. But modest regulation of wages may produce inefciencies sufciently small to accept. That regulation of wages is not necessarily undesirable can be seen, nally, by comparing it to successful persuasion. The successful persuasion of rms to change their compensation policies may have the same effect as the legal regulation of those policies. Suppose that rms pay their workers market-clearing wages. But suppose that all or many rms are persuaded by the arguments of public interest groups to give their lowest paid workers a raise. Suppose nally that neoclassical economic theory is correct in its prediction that this will lead to a rise in unemployment among the lowest paid workers, as rms will hire fewer of them. Have rms done something wrong by freely choosing to pay their workers higher wages, even at the cost of employing fewer of them? If we say no, then it is hard to see how we can object to regulation on the grounds that it is inefcient. In this case, regulation and persuasion lead to the same inefciency: unemployment because of higher wages. To recap, Reason 4 claims that, even if justice requires changes in how much certain workers are

paid, there is little that can or should be done about it. In this section, I deated that worry, arguing that there is reason to think that rms can be persuaded to do what is right, and that if they do not, regulation is a viable option. We do not know what justice requires with respect to compensation, so we do not know how difcult or costly it will be to achieve it. But we should not be deterred in our inquiry by the thought that our results cannot be translated into action.

Conclusion
In this article, I identied four reasons for ignoring the normative aspects of compensation and argued that they are all awed. I have not mounted a detailed positive case for examining the normative aspects of compensation, but the case is clear. Workers care about how much they are paid, and they think about their pay in normative terms. While much has been said about the causes and effects of rms compensation practices, little has been said about their justice. Normative theorists can make valuable contributions to this neglected inquiry. The ultimate goal of this inquiry is to subject rms actual pay practices to normative scrutiny. Employers make many choices in designing, implementing, and managing their compensation systems, including how much to pay their employees compared with other employers, how much to pay their employees compared with each other, and whether they will receive performance-based pay, and if so, how much and in what form (Gerhart & Rynes 2003, Milkovich et al. 2008). All of these choices can be evaluated from a moral point of view. Progress toward this goal can be made by examining from a moral point of view the many theories social scientists have developed to explain why rms pay their employees what they do. Among these are agency theory (Jensen & Meckling 1976), equity theory (Adams 1963), human capital theory (Becker 1975), institutional theory (DiMaggio & Powell 1983), and tournament theory (Lazear & Rosen 1981). So, for example, normative theorists may consider whether it is morally justiable for rms to structure their compensation systems as rank-order tournaments (tournament theory), with outsize

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prizes going to the winners, as opposed to paying workers on the basis of their contributions, as determined in part by their human capital (equity theory, human capital theory). They may also consider the normative signicance of historically common forms of compensation (institutional theory), and the role of compensation in reducing agency costs (agency theory) (Eisenhardt 1988). By identifying compensation structures and practices often found in the market, social scientists have provided normative theorists many targets for their inquiries.

5.

6.

Acknowledgements
A version of this article was presented at the 2010 meeting of the Society for Business Ethics. My thanks to the members of that audience for helpful discussion of the paper and to Robert Frederick for comments on a draft of it.

7.

Notes
1. How much attention philosophers should pay to the intuitions of the folk is a matter of debate. Experimental philosophers argue that many philosophers do not pay enough attention to them (Knobe & Nichols 2008). 2. The theory predicts, in particular, that workers will be paid their marginal products. In reality, this is unlikely to happen (Frank 1984). 3. Reason 1 also has reduced force against government agencies. While there is a limit to how much tax revenue the state can extract from its citizens, the relative lack of competition government agencies (e.g. the police) face gives them more exibility about what to pay their employees. Challenging Reason 1s force only in the public sector is unsatisfactory for two reasons, however. First, a minority of workers in societies with market economies are employed by the government. Second, this reply does not address the neglect of the normative aspects of wages by business ethicists, as they tend to be concerned with organizations in the private sector. 4. It might be wondered whether this difference in wages is compensated for by differences in other amenities, such as health care or retirement benets. It is not. Costco offers signicantly more

8.

generous benets to its workers than Sams Club does, exacerbating the disparity (Guthrie 2007). It might be observed that rms compensation policies reect, in part, their choice of organizational strategy. This conrms rather than challenges my conclusion. Because rms can, within limits, choose different organizational strategies, they can choose different compensation policies. While these passages imply support for Reason 2, I do not know whether Bowie and Werhane would wish to endorse this Reason upon reection. In fact, in work with Arnold (2003), Bowie argues that paying workers a living wage is required by respect for persons. I have some reservations about attributing this view to Boatright. After claiming that a central part of capitalism is that each person has a right to whatever he or she gains by exchanging his or her property through voluntary transactions (2010: 172), he says that this principle has limits (2010: 172). In particular, he notes that the state does not permit certain transactions, such as a persons working below a minimum wage (2010: 172). Moreover, Boatright seems to imply that this limitation is justied. But his argument to this point implies that this limitation is unjustied. So Boatrights view might instead be: each person has a right to whatever he or she gains by exchanging his or her property through voluntary transactions, assuming that those transactions are permitted by law. This view is much weaker than the one under consideration. Indeed, as it puts no limitations on what the laws about wages might be, it is compatible with a strict set of such laws, leaving only a tiny space for employers and employees to maneuver in wage negotiations. (Boatright suggests elsewhere that there is sound economic reason for workers to be paid their marginal products, so he may favor government regulation to bring this about.) Note also that this view is compatible with the value of research on the normative aspects of wages, for example, to tell us what the laws about wages should be. I think it would be unwise, however, to use this interpretive issue as an excuse to avoid discussion of the argument for the libertarian view of justice in wages that is suggested in Boatrights text. Whether or not Boatright ultimately wishes to endorse it, it seems worthy of examination. As this implies, not all criticism of executive and sweatshop worker compensation is focused on the

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character of the agreements between employers and employees. Arnold & Bowie (2003), for example, argue that paying workers a living wage is required by respect for persons. 9. One might try to carve out an exception for wages. If capitalism is characterized by the use of markets to allocate and price goods, it might be said, then it requires that the price of labor (which is just another good) is set in the market, not by the state. Against this, I have argued that other features of ones job, including the degree of security and safety it offers, can be understood as part of labors price. So if the state can regulate these under capitalism, it can also regulate wages narrowly construed. I consider objections to the governments doing so below. 10. It might be thought that a tax penalty on rms that pay their workers below a certain wage is equivalent to an effective legal minimum wage. To be sure, instituting a minimum wage of $N per hour is similar to penalizing a rm $N$M per hour for every worker it hires at $M per hour (assuming that M is less than N). But these policies need not be equivalent. First, in the case of the penalty, rms are permitted to pay the lower wage; they just have to pay a penalty if they do not. In the case of the minimum wage, rms lack this option. Second, and more importantly, the tax penalty need not take the form described earlier. It could be all-or-nothing, depending on the number of workers a rm employs below a certain wage. Such a penalty would give rms the option of employing some workers at the low wage while giving them an incentive not to employ too many workers at this wage.

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