Sunday, September 4, 2011

Who Should Decide Executives Pay?

How much should the Executive Team be paid and who should be involved in the decision? Executive pay has always been an emotive issue, but this issue is raising new concerns as the world comes out of a global recession and many workers are struggling to make ends meet - as John Cridland, the director-general of the Confederation of British Industry stated, "at a time of austerity, when everyone is seeing their income squeezed, executive pay is a particularly sensitive issue."

An article by Robert Watts sites a poll that was commissioned in the UK that found that almost half of the 2,000 people polled thought the annual pay of FTSE 100 chief executives was less than £1 million. When they were told that the true figure was almost £5 million, just 1% believed that such a sum was justifiable.

But who should be involved in the decision around executive pay - for most organisations in the public sector the board and shareholders are involved with pay decisions. These days organisations will undertake comprehensive surveys to benchmark their pay structures with other organisations - so it's not that boards are just coming up with a figure. Shareholders to have a significant vested interest in the performance of the CEO and executive team and hence shouldn't vote through unrealistic pay agreements.

In the UK, Vince Cable, the Business Secretary believes that workers should be given new powers to help decide how much their bosses should be paid - but I wonder how exactly that would work in practice. I can just visualise someone who hasn't been active in business for some time, sipping their single malt whisky in their private club, thinking that in a perfect world how great it would be for workers to determine their bosses pay. Imagining Joe from maintenance and Joyce from Reception, strutting into the board room and productively discussing the current global trends in executive pay and while puffing on their first Cuban cigar telling the CEO that they will have to cut their pay this year by 10% to be in line with their expectations.

Executive teams that abuse pay at the highest level aren't going to have their ways changed whoever you send in from the employee base. It is a culture that resides at the top and can only be changed from the top. These orgnisations use power and fear within the organisation and decide their annual pay rewards with little fear of being questioned. What's interesting, is those that moan about their bosses salaries, quickly change their tune if and when they rise to the same positions - then all of a sudden they 'cash' in on the cultural norm for this establishment.

Of course these organisations with the questionable ethical approach to executive pay are most likely to only invite those employees to join a pay review panel that are going to do as they are told - making a further mockery of the system.

It's not all doom and gloom, in Germany for example, supervisory boards set executives’ pay. Half the members of each board are lay staff, often trade union representatives.

The simple answer in a transparent organisation is that the executive pay should be understood and acceptable to all (or at least most employees). Where you need to legislate around executive pay - you actually need to change the culture as no 'forced measures' will get the required response.

Great organisations with great leaders have transparent pay and reward systems - poor organisations with poor cultures live in a world of secrecy. Change the culture and you'll change the approach.....


Watt, R. (2011). Cable may give workers a say in bosses' pay. Sunday Times. 4th September, p.10.

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