In their academic paper “Bridging Theory and Practice: Ethical Governance of Executive Compensation in the Financial Times Stock Exchange 100”*, published earlier this year Perkins and Shortland report that the Chief Executive Officer (CEO)-to-worker pay ratio stood at 324:1 among Standard and Poor’s 500 companies in 2022, up from 61:1 in 1989. Not only is the differential considered to be egregious but it continues to increase.Media headlines regularly identify not only examples of excessive executive pay but place these in the context of poorly performing businesses. This underscores the need to examine ethical and moral dimensions of executive compensation governance.

Ethical versus moral considerations

Ethical considerations typically refer to externally defined standards of right and wrong conduct. These are often codified in rules or principles and include transparency, accountability and compliance.Moral considerations refer to an individual’s principles of right and wrong. These are shaped by personal values, cultural norms, and societal expectations and include fairness, proportionality and sustainability.

Ethical principles

It is important as a first step to understand the different definitions of ethical principles and their interplay within executive compensation, namely those of utilitarianism, deontological ethics, and virtue ethics.Utilitarianism focuses on the greatest good for the greatest number of people and has relevance as to how executive compensation contributes to overall societal welfare. This ethical perspective raises questions as to how high executive pay can be justified in relation to average worker compensation and broader economic inequality.Deontological ethics emphasises moral duties and obligations, prompting consideration of the moral responsibilities of executives, board members, and shareholders to ensure that compensation practice is fair and just.Virtue ethics focuses on the character of individuals, raising questions as to how compensation structures can promote virtuous leadership and ethical behaviour as a priority within corporate culture.Applying ethical principles in executive compensation governance generates complexity for decision-makers. Board members who sit on Remuneration Committees (Remcos) who decide the formulae for determining executive compensation must balance various ethical considerations with practical business needs and manage potential conflicts between shareholder interests, executive motivation, and broader stakeholder concerns.There is also the need for regulatory compliance and demands for transparency in executive compensation reporting and these raise implications for issues of trust, accountability, and fairness.

The role of corporate social responsibility

There is a growing emphasis on businesses demonstrating Corporate Social Responsibility (CSR) as part of their wider ESG (Environmental, Social and Governance) strategies and this places additional demands for ethical considerations in executive compensation decision-making. For example, linking executive compensation to broader CSR goals and metrics raises questions about how to incentivise ethically long-term, sustainable value creation, as well as concerns about the potential for manipulating CSR metrics through the commodification of ethical conduct.In globally-based organisations, a further complexity arises through the need to navigate diverse cultural contexts and how to reconcile differing cultural perspectives and local norms in respect to fair compensation and ethical principles.

Remco reports: Analysis of company practice

Perkins and Shortland’s (2025) research analysed ethical practices in a sample of Financial Times Stock Exchange-100 (FTSE-100) Remco reports. Most of the firms analysed demonstrated moderate to strong alignment with ethical principles, but with room for improvement.The authors identified a number of factors that influenced companies’ approaches to ethical compensation governance. These included: the comparative regulatory environment; company size and global presence; corporate culture and leadership; and investor pressure.With respect to the regulatory environment, financial services face stricter regulations and so these firms tend towards more conservative compensation practices. More globally diverse, large companies face greater challenges in ensuring pay equity across different markets. Companies with a strong ethical corporate and leadership culture, often reflected in their stakeholder engagement, tend to have more progressive compensation practices. Increasing activism from institutional investors tends to drive forward a greater focus on ESG metrics and long-term value creation in compensation packages.Key themes as identified in Remco reports included: a strong focus on stakeholder engagement and value creation; a growing trend towards incorporating ESG metrics into executive compensation packages; efforts to address the issue of pay equity, both internally and in relation to broader societal concerns; and a trend towards greater transparency in compensation decision-making processes. However, there is still room for improvement in these and particularly in the integration of virtue ethics into compensation practice. This suggests an opportunity for companies to link executive compensation more explicitly to ethical leadership and corporate culture.

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Remco decision-makers: Analysis of viewpoints

The second strand to the research study analysed Remco decision-makers views’ on ethical issues in executive compensation determination and the complex interplay between the need for effective governance and the practical challenges involved in its implementation. These individuals were elite and hard-to-reach senior personnel, including non-executive directors acting as Remco members/chairs, institutional investors, and external specialist executive compensation advisers.Their comments suggested that current governance structures may prioritise conformity over tailored, company-specific solutions, potentially undermining the alignment of management and shareholder interests. There was also a growing scepticism of the ‘talent war’ narrative often used to justify high executive compensation, suggesting attempts among decision-makers to balance fairness with the need to attract and retain top talent.The interviewees expressed concern about the potential for executive rewards to undermine public trust, revealing keen awareness of the social contract between business and society. Interviewees also placed a strong focus on the integration of ESG metrics into executive compensation frameworks, demonstrating their increasing interest in long-term sustainability.In addition, decision-makers highlighted the need to consider a broader range of stakeholders in executive compensation decisions and the importance of maintaining social legitimacy. However, balancing diverse stakeholder interests, they said, remained a challenge. The complex and unintended effects of increased transparency in executive compensation were also addressed in the sense that transparency was seen to have the potential to drive up compensation levels through competitive benchmarking.The importance of ethical leadership and corporate culture in shaping compensation practices emerged as a key theme, with the tone from the top being seen as crucial. Their emphasis on ethical leadership suggested recognition that effective governance of executive compensation goes beyond formal structures and policies to include the values and culture of the entire organisation.Finally, the interviews highlighted various contextual factors including industry-specific challenges, regulatory environments, and broader economic trends, all of which influenced executive compensation decision-making.Overall, the interviews revealed a complex executive compensation governance landscape characterised by competing pressures and evolving expectations with ongoing tension between market pressures and societal expectations, and unintended consequences from increased transparency. The translation of ethical and moral principles into practice remains challenging despite the acknowledgement of the critical role of ethical leadership in shaping compensation practices.

Recommendations for practice

The analysis revealed rising concern about the perceived unfairness of the widening gap between executive rewards and other stakeholder outcomes. This suggests that ethical executive compensation governance requires a nuanced understanding of stakeholder interests, the commitment to long-term value creation, and courage to make principled decisions based on informed judgment. Gaining wider public trust will become ever more critical.Recommended actions could include the development of more comprehensive stakeholder engagement potentially involving regular stakeholder consultations and public perception surveys, and the creation of metrics that more accurately reflect impact on stakeholder groups. The development of more sophisticated pay ratio metrics could address vertical (executive to worker) and horizontal (across different business units/geographies) equity.With respect to utilitarianism and virtue ethics, ethical leadership assessments could be incorporated into performance reviews and a portion of compensation could be linked to the development and maintenance of a strong ethical corporate culture.

Concluding remarks

Remco decision-makers face a number of challenges and tensions in determining and implementing executive compensation in the complex corporate governance landscape. While ethical considerations do shape practice decision-makers face persistent challenges in balancing pay determination with wider ethical considerations.Notwithstanding this, by integrating ethical and moral considerations into corporate governance practices, companies can enhance their legitimacy, stakeholder relationships, and public perceptions and contribute to a more equitable and sustainable business environment.

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Further reading

*Perkins, S.J. and Shortland, S. (2025) ‘Bridging theory and practice: Ethical governance of executive compensation in the Financial Times Stock Exchange 100’ Compensation and Benefits Review.Available at: https://journals.sagepub.com/doi/10.1177/08863687251336654?utm_source=selligent&utm_medium=email&utm_campaign=joa_con_authc_multi_publishedauthorcarejourney&utm_content=23u0062_ao&utm_term=&m_i=_yb8JLcNNvpHTYgNMBQf5EYxjVNWv9wsCytIBYal4NjnkhpaIBvhapM8amzc5wQeIgY%2B89fXrYiJQB6iDw4g7KbgzuzY0mD3uvZf_I&nbd=56652171&nbd_source=slgnt&M_BT=1604742992279236Dr Sue Shortland wishes to acknowledge the contribution of Prof. Stephen J. Perkins to the content of this article.

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