Research Findings

“It’s the value that we bring.” how top income earners view inequality

March 16, 2023

The “one percent” are increasingly seen as an important point of debate in discussions on rising inequalities. But how do top income earners themselves perceive their income? Do they view top incomes as fair?

To answer this question, I conducted a study where I interviewed people in the United Kingdom with incomes that place them within the top one percent of the distribution. Most of the 30 top income earners I talked to were men, lived in London and worked in the financial industry. They worked in firms such as investment banks, hedge funds, and barristers’ chambers.

I found that the cultural process of performance pay is important for how top income earners perceive inequality.

Performance pay

Many participants explained that incomes in their industry are “performance-based.” The idea of performance pay is that reward reflects economic contribution.

Performance pay, the practice of evaluating individuals’ performance (that is, their economic contribution) and paying them based on this performance evaluation, is a cultural process. It is also an increasingly prevalent business practice.

Performance pay, my participants noted, can be calculated based on quantitative metrics in the form of hedge fund compensation structures and “formulas” for investment bankers and traders. However, interviewees also discussed qualitative or “subjective” performance evaluations.

An example of performance pay is hedge funds’ compensation structures. These are based on market performance. Hedge funds derive income from a standard financial evaluation based on a widely accepted formula, “2 and 20.” This means they receive a management fee of 2 percent a year on the money they manage as well as 20 percent of the investment gains.

So, if someone “runs” a hedge fund of £100 million, they earn at least £2 million annually plus 20 percent of any increased value over these £100 million.

Performance pay legitimates top incomes

Alistair, previously a partner at an investment bank, explained that while he is concerned that “the world has got so stretched now,” he cannot help but feel like extreme incomes are deserved when they are based on economic performance:

I used to pay a lot of people at [prestigious investment bank], and I know how ruthless that was based upon performance. And I know that they were actually generating a lot more money for the partnership than we were paying them, so I didn’t feel bad about that at all.

Further, to Alistair, being paid based on market performance makes people “feel like” they “earned that.”

In this view, being paid a share of the profits of the investment bank justifies top incomes.

If you are a partner in a firm like the one I was a partner of… if you go to a full partners meeting… having paid all the staff and having settled all the bills… you know that if the figure is this, you divide it by [the number of partners] and that’s what you’ve had.

Did you feel like you had earned that? Yes, you did.

Performance pay is important for perceptions of inequality

Performance pay focuses attention on narrow, economic criteria of evaluation. The main evaluative criteria which my participants used were economic, precisely the ones which are used to evaluate people’s contribution in their industry.

Economic evaluators are a majority of the sample and told me that top incomes are a reflection of economic “contribution” or economic “value created” and therefore deserved. They are performance pay meritocrats. Focusing on narrow, economic criteria of evaluation, they justified income differences—no matter how vast—as the result of market competition and therefore deserved based on merit.

For example, Ted, a hedge fund manager with an annual income that “can range from £5 million

to £50 million” did not perceive inequality as measured by top income shares as relevant:

If a very, very small proportion of people get very wealthy, then everyone else just gets wealthier over time. I mean what’s wrong with that? That’s like me complaining: “Chris Froome is just a much better cyclist than I am, because he is in the 0.001 % of cyclists, who can cycle up eternally at 30 kilometers an hour, and I can’t do that. Inequality in cycling is just going up because Chris Froome is getting better and better.” It’s just not a very sensible way to think about the world. Look, I don’t care about inequality, what I care about is that everyone is getting wealthy at some rate.

Choosing extremely elite, high-performing athletes as a comparison group is telling. These narratives imply rare skills and high levels of competitiveness. The sports narratives in my sample were also gendered and racialized. People’s reference group was white, male sportspeople.

This finding is in line with previous studies which have found that women are evaluated as less competitive, and are less likely to be described as having “excellent” performance. For Ted, extremely high incomes reflect exceptional performance (like Chris Froome’s). Therefore, he is not concerned about inequality—referring, on a side note, to “trickle-down economics”, the idea that the wealth of the rich will trickle down to others in society.

With reference to the achievements of sportspeople, many participants presented top incomes as a reflection of talent, akin to achievements in a sporting competition.

However, some participants were social evaluators or social reflexivists – they did not see market outcomes as necessarily just and considered broader evaluative criteria including social justice and fairness.

Jonathan, a hedge fund manager, who was very much interested in sociology and was curious to hear more about my research, said he had an annual income of approximately £15 million. He explained that he can “earn a stupid amount of money and no one complains because my clients are very happy as well cause I’m making them lots of money.”

However, he would prefer top income shares to “be chopped in half” because:

I mean no one could describe what I earn, or what people in my company earn, as being fair. I mean, it’s just the market… Is it fair? No, it’s not fair, and so therefore it should be taxed, and so I should pay much higher levels of tax… But I think I’m a minority of one, amongst hedge fund managers. Because I am sure they would say they all deserve it but how can you say you deserve it. It’s ridiculous!

Jonathan, like other social evaluators in the sample, did not view top incomes as fair. Therefore, he advocated for higher taxation for people like himself.

Implications for society

This research has implications for society. If we seek to address inequality, we must consider how pay—including at the top—is set. We have to seriously address questions like: What do we see as “earned”? and What criteria do we apply when evaluating people’s contribution?

Market-based performance pay, commonly used in the City of London and on Wall Street, narrows focus to economic criteria of evaluation. Individuals have to actively work to incorporate broader social criteria.

Further, in this study, I found that participants viewed top incomes largely as performance-based and therefore meritocratic. Consequently, performance pay is crucial for the justification of meritocracy, and hence the legitimation of inequality.

Read more

Katharina Hecht “‘It’s the value that we bring’: performance pay and top income earners’ perceptions of inequality” in Socio-Economic Review 2022.

Image: Pexels via Pixabay (Pixabay License)

An earlier version of this post was published in the In_equality magazine 02 of the ‘Politics of Inequality’ Cluster at the University of Konstanz.

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