Business ethics, pay and rewards, and corporate social responsibility

Ethics in strategic decisions

An ethical decision is based on moral principles: fairness, honesty, avoiding harm. Ethical issues arise in:

• sourcing (supplier working conditions, child labour, fair prices to farmers);
• marketing (honest claims, advertising to children);
• the environment (pollution, waste, carbon emissions);
• dealing with competitors and governments (bribery, tax avoidance).

There is often a trade-off between profit and ethics: ethical choices may raise costs (paying a living wage, sustainable materials) or mean giving up profitable opportunities. But they may also bring benefits: brand reputation, customer loyalty, the ability to charge a premium, easier recruitment, and less risk of fines or boycotts. In the January 2020 WBS13 paper, Question 1(e) asked whether a luxury brand faced a trade-off when it stopped using real fur and stopped destroying unsold stock.

Pay and rewards

Pay raises ethical questions as well as motivational ones:

• Executive pay: very high pay and bonuses for directors compared with ordinary staff can be seen as unfair, especially when bonuses are paid while workers' pay is frozen or jobs are cut. Supporters argue high pay is needed to attract talent.
• Low pay: paying the legal minimum may be lawful but seen as unethical if it is not enough to live on; some firms choose to pay more.
• Pay gaps between men and women, or between groups of workers.
• Bonus schemes that reward short-term targets can encourage unethical behaviour, such as mis-selling.

Corporate social responsibility (CSR)

CSR is when a business voluntarily takes responsibility for its impact on society and the environment, beyond what the law requires. Examples: cutting emissions and waste, ethical sourcing, community projects, staff volunteering, publishing a sustainability report.

Reasons: reputation and brand, customer and investor demand, motivating staff, anticipating future regulation, the owners' values.

Criticisms: it can be 'greenwashing', public relations without real change; it costs money that shareholders may feel is theirs; the shareholder model sees a firm's social duty as making profit within the law.

Worked example

A chocolate maker considers paying cocoa farmers 20% above the market price under a certification scheme. Assess whether this is a trade-off between profit and ethics.

1. Costs rise, which cuts margins unless prices are raised: a short-term trade-off.
2. But the certification can be used in marketing; ethically minded customers may pay more and stay loyal.
3. Secure, better-paid suppliers may deliver more reliable quality.
4. Judgement: whether there is a real trade-off depends on how price sensitive its customers are and whether the extra cost can be passed on.

Answer: A short-term trade-off that may disappear if the brand benefit allows higher prices or loyalty.

Check yourself

1. Which decision is the clearest example of an ethical choice that goes beyond the law?
   • Paying the corporation tax the business owes
   • Following health and safety laws
   • Paying staff more than the legal minimum wage so they can afford the cost of living
   • Publishing accounts as required by law
   Show answer

   Paying staff more than the legal minimum wage so they can afford the cost of living. Ethics goes beyond legal compliance.

2. Corporate social responsibility is best defined as
   • voluntarily taking responsibility for the business's impact on society and the environment
   • obeying all the laws that apply to a business
   • maximising profit for shareholders
   • giving all profits to charity
   Show answer

   voluntarily taking responsibility for the business's impact on society and the environment. CSR is voluntary and goes beyond the law.

3. A firm advertises itself as eco-friendly while making almost no changes to how it operates. This is known as
   • ethical sourcing
   • corporate governance
   • greenwashing
   • diversification
   Show answer

   greenwashing. Marketing claims without real change.

4. Why might ethical behaviour not reduce profit in the long run?
   • It always reduces costs immediately
   • It can build reputation and loyalty, allowing higher sales or prices
   • It removes all competitors
   • It means the firm pays no tax
   Show answer

   It can build reputation and loyalty, allowing higher sales or prices. Ethics can be a source of competitive advantage.

5. Why can bonus schemes based on short-term sales targets raise ethical concerns?
   • They always reduce staff motivation
   • They are illegal in most countries
   • They make pay the same for everyone
   • They may encourage staff to mis-sell products to customers
   Show answer

   They may encourage staff to mis-sell products to customers. Pressure to hit targets can lead to dishonest selling.

6. Explain one reason why a business might choose to adopt corporate social responsibility policies.
   Show answer

   To improve its reputation and brand image, which can attract customers who care about ethics and so increase sales and loyalty.. Name the benefit and who responds to it.

Practise with instant feedback Print this lesson

Sources

• Pearson Edexcel International Advanced Subsidiary/Advanced Level in Business specification (XBS11/YBS11, 2018), Unit 3 Business decisions and strategy and Appendices 6, 7 and 9
• Pearson Edexcel IAL Business WBS13/01 mark scheme, January 2020

Last updated 8 November 2026. Spotted a mistake? Tell us.