Pay should go hand in hand with performance, not with potential

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Another spate of top executive pay disclosures in global businesses and of less than impressive results reinforces yet again the complete lack of any really effective link between pay and performance at the top of global organisations.  This time it’s Goldman Sachs, but they are not alone.

There are two issues here.  First, high rewards should be associated with both the level of personal performance and the level of personal risk. Secondly, there needs to be a fair relativity between the best rewarded and the rest.  A sign of a well run business is that the highest paid executive should never earn more than an agreed multiple of earnings relative to either the lowest paid or the average employee. For the sake of the reputation of business in general, action is needed to rein in a culture of excess in large organisations. I would like to see the policy adopted by mutual retail store John Lewis, which defines a relative difference between the CEO and lowest paid become more commonplace.

In the space of 10 years the pay of CEOs in the UK went from being 38 times the employee’s pay in 1997 to a multiple of 98 times by 2007. There is no doubt that leaders create vision and guide strategy but the execution of that strategy falls to the many not the few. It is the relative inequitable distribution of the benefit amongst people who could all equally well claim to have contributed great effort to what is a collective outcome that becomes such a corrosive factor in modern organisational culture.

Research has consistently shown the argument that talented leaders need massive remuneration to drive performance to be false.  Nothing has happened in demographics or in the recruitment market to justify such a significant hike in relative rewards.  To find anything approaching this level of self-aggrandisement in North America and Western Europe we would have to look at the exploitation by the aristocracy of the distribution of land, titles and national resource monopolies such as salt handed out by absolute monarchs in Europe of the 17th Century. As a seizure of economic power from the many to the few this has all the hallmarks of a coup.

Corporate managers are not owners; they are stewards of their owners’ capital and it is not their wealth, their property or their futures they put at risk. The real owners are often pensioners or future pensioners with very few assets. Most of their employees earn around the average wage or lower. Many of the communities in which they have they have factories, offices and depots have few, if any, other significant sources of paid employment. The actions of corporate managers and their advisors and the decisions of those who channel owner funds into corporations have to accept new roles and new rules if they are to deliver long-term wealth creation that sustains rather than corrodes public confidence in the market.

Executive rewards need to be reframed and this could include abolishing share options, removing unnecessary benefits and imposing much stricter expense regimes, changing the reward structures for fund managers and reconsidering the link between motivation and money.

Whilst governments could act to impose more regulation (and in my view should act to make votes on the remuneration report binding rather than advisory), ultimately however change that makes a difference can only come if business leaders themselves act as stewards in the interests of all stakeholders in the firm and not as individuals acting in their own interest. The only people who can curb the excess for good are those who benefit from it. That is the real test of leadership: it will be interesting to see if anyone steps up and acts for the greater good, or whether our current business leaders are just in it for what they can get.


# Scott Watson 2011-05-26 13:10
Hi Chris

I enjoyed reading your article. May I ask you to share your thoughts on how to concept of 'Golden Hello's' fit in with your thoughts pay and performance?

Just because an individual has delivered fantastic results for a previous employer, it doesn't always mean that their performance will be reproduced in their new company. How would you recommend a company wishing to hire a new exec tackle the potential problem of 'I'll need a signing-on bonus' when the individual hasn't yet delivered any real value to the organisation? Is it fair or not to pay up front for 'potential good performance?
Many thanks Chris.

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