Friday, 12 June 2009

How to fix Executive Pay

 

    It must be such an interesting time to be a reward practitioner at at the moment. I don’t tend to get involved in this area myself, apart from at a very high albeit extremely valuable) level. My blog reflects this – I did very little posting about reward during the first year or so or my blog, but it has recently become one of my main topics of conversation. It’s also receiving a lot of attention elsewhere, including in a very interesting debate on CEO pay on Harvard Business Review’s website.

The context for this is the general perception that executive pay played a major role in creating the financial crisis and leading to the current recession by encouraging excessive risk-taking. And more specifically, there’s the US administration’s plan to rein in compensation at publicly traded companies by increasing shareholder and decreasing management influence on pay decisions (a bit like the system we have in the UK in fact - not that this seems to have done us much good!).

The case for leaving executive compensation to Boards and Rem Coms is made by Ira Kay from Watson Wyatt:

“Legislating and regulating executive compensation has the capacity to do real damage.”

 

Kay’s case is built on two pieces of WW research:

“Our research has shown that the traditional executive pay model using cash and stock incentives continues to work for the vast majority of companies. It motivates leaders to steer their companies toward high performance.”

 

In general, I agree with this point. Variable pay has an important role to play in any reward strategy. However, Kay should choose his words carefully. We know that pay is a hygiene factor, not a motivator (Herzberg). And it’s interesting to note the recent comments from Shell’s CEO, Jeroen van der Veer, stating that his reward has made no difference to his leadership performance:

“You have to realise if I had been paid 50 per cent more, I would not have done it better. If I had been paid 50 per cent less, then I would not have done it worse.”

 

See also this comment from Robert Talbut, chief investment officer at Royal London Asset Management:

"The idea that the incentive needs to be huge to elicit the right kind of behaviour is wrong. Institutional investors have got to get more used to saying 'no'."

 

Reward is just one element of an employment value proposition, even for a CEO, and we should be careful not to make too much of a meal of it. The danger of doing so is that we create the sort of money motivation in executives that we actually want to avoid (Lynda Gratton wrote an excellent article on this a few years back that I am still attempting to find).

 

“Our research shows that in general, high-performing companies' CEOs get paid a lot, and low-performing companies' CEOs get paid much, much less.”

 

Oh really? There is, of course, also quite a bit of research that indicates the reverse (see, for example, here).

 

Given these challenges, I disagree with Kay’s perspective and think that there is a need for a wholesale rethinking of the traditional executive-pay model. I don’t even think it’s an issue about framing, ie about whether we see his debate in practical, economic or moral terms.

There is a very practical problem in the fact that CEOs’ rewards have been increasing at a much faster rate than that of the employees they lead. This sort of differential detracts from organisations’ ability to create inclusive teams, working to a shared agenda.

There is a very practical problem in the fact that money motivated CEOs create a money, rather than a mission, orientation throughout the rest of the organisation too. This makes it harder to gain commitment rather than ensure compliance, from all employees.

There is a very practical problem in that organisations which pay CEOs very large rewards without increasing their motivation (eg Jeroen van der Veer) or influencing their organisation’s performance, are throwing money down the drain.

 

I’ve got nothing against Boards trying to find the best CEOs they can, and in paying them what their contribution is worth, but perhaps they need to balance the benefits of a less money-motivated, more team oriented leader against a potentially more talented (and therefore more costly) individually-oriented star?

 

 

 

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