Wednesday, 10 September 2008

Cut my pay, no way!


   The UK's Chancellor of the Exchequer (Finance Minister), Alistair Darling, has been getting a tough time at the Trades Union Congress, held in Brighton and in Second Life, after telling delegates that pay rises for public sector staff would cause a surge in inflation and lead to mass redundancies.

One of the key issues seems to be the growing disparity between management and staff, which I posted on a few days ago, with General Secretary Brendan Barber commenting that "It's not fair that employees are facing a fall in their living standards while top bosses see their pay packets go up by 20% or even 30%."

Yet according to  Management Today, that may not be entirely true:

"A survey out today from salary specialists Income Data Services suggests that management pay hikes have also declined to below-inflation levels. Apparently the average pay hike for senior bosses fell from 4.7% to 3.9% last quarter, while managers across the board are getting an average increase of 3.8% - just 0.3% above the average for non-management staff. ‘Top tier management are now starting to share some of the pain felt by their more junior colleagues,’ says IDS’s Steve Tatton."


And this week's People Management includes a thoughtful article from Watson Wyatt's Vicky Wright, Time to tighten the belt? which asks:

"[How should Remuneration Committees] reward a chief executive who is steering a company through a tight and competitive market, with declining sales and profits? What should a director receive this year if they were paid a handsome bonus last year for winning business that turned out to be worth half the value the company thought it was 18 months ago? What should a star performer receive if the company as a whole is struggling?"

She notes:

"Executive remuneration has also become divorced from reward management for other staff. Chief executives’ base salaries have been increasing in the past three years at around 7-10 per cent a year, well above the increase in average earnings. Annual bonus opportunities and share grants have been rising faster. Last year, the median annual cash bonus for a FTSE-100 chief executive was just over £800,000, from £580,000 in 2006. The median value of a FTSE-100 CEO’s total remuneration package (excluding pensions/benefits) was just over £2.5m in 2007, with base salary accounting for some 30 per cent of this.

These six- and seven-figure earnings disturb many people and certainly stir up media comment. But there is an economic rationale behind them. There is compelling evidence that the right leadership team can make a tremendous difference to the performance of an organisation, providing long-term superior returns to shareholders, better products and services to customers, secure jobs that pay competitive remuneration, and returns to the community in which it operates. Good executive remuneration design reflects this, with a significant proportion of performance reward in the form of cash bonuses and share plans that are designed to align the interests of executives and shareholders by linking the executive’s pay to profits or share price."


I think that Wright is absolutely right, both in her analysis of this 'disturbing' trend, and in her advice to pay leadership teams for their performance.  But according to Patterson Associates survey and other research, this isn't happening effectively.  One requirement is that executive reward focuses more on the longer-term, and ensure that short-term incentives focus on lead business indicators (like people) as well as financial results (at least, as I have also previously posted, as long as the organisation has a culture of continuous improvement and operates in an environment of high business risk).

Wright makes a number of other sensible suggestions and I'd propose three more:

  • Ensure that the organisation has a unique proposition (mojo), which is cascaded through its employee value proposition and employer brand.  If this is differentiated enough, and you select people (including executives) based upon it, you're going to be in a position where at least some of the value you offer doesn't come with a £ / $ sign attached.
  • Develop leadership throughout the organisation.  Wright's right to say that the "right [that's a mouthful] leadership team can make a tremendous difference to the performance of an organisation".  But if leadership is dispersed then a), the whole company is going to be more effective, and b), there will be a less significant differential between the impact that top executives and the rest of the organisation make.
  • Do your succession planning and grow senior leaders internally.  Ensure you have a fall-back plan if a top executive decides to leave.  Don't be held a hostage.