Wednesday 25 November 2015

ATD Talent Management Handbook - Pay Ratios

A new provocative report has been published by the High Pay Centre - Pay Ratios: Just Do It.

The report argues that companies should report the ratio of CEO pay to that of those in the middle of the organisation and that this would help understand their attitudes to pay.

That would seem to be quite important, particularly given John Cryan's remarks that as the CEO of Deutsche Bank he "doesn't understand the way additional excess riches drive people to behave differently".

"I promise you I will not work any harder or any less hard in any year, in any day because someone is going to pay me more or less."

Perhaps Cryan should check out the ATD 's new Talent Management Handbook where my chapter focuses on reward and tries to provide some of the missing understanding.

Here are my comments from the handbook on pay ratios:

Reduced Pay Differentials

Organizations have increasingly recognized the differentiated performance of their employees over the last few decades.  Some organisations suggest that their high performers are worth several tens or even several hundreds of times their low performers.  The result of this is that pay differentials, in Anglo-Saxon cultures at least, have increased substantially. For example FTSE 100 CEOs are now paid around 180 times as much as their average employees.  However, and perhaps because of this, there is also a growing belief, supported by the points raised earlier, that we have gone too far in incentivizing and rewarding talent and high performance and in increasing executive compensation disproportionally compared to other employees.  There are also rising society demands for increased equality and these are likely to grow stronger if we see more pay transparency.

However the most important reason to reduce differentials is that this can improve overall business performance.

High pay differentials make perfect sense from a perspective which emphasizes the contribution of individual employees, which is the case with most talent management practices, particularly those that might be described as being focused on human capital management (HCM) ie which are concerned with creating and accumulating human capital as an outcome of talent management practices.

However these activities can also destroy the social fabric of our organizations.  This can be shown by reviewing one of the other findings  of the Edelman Trust Barometer which suggests that one of the few relationships which has seen an upswing in trust over the last decade is what Edelman call a Person Like Yourself, or PLY.  This is somebody you have a personal connection to that brings you together as humans, for example you come from the same home town, you have a similar taste in music, or you support the same football team.  The concern about high differentials is that if your CEO is paid 180 times as much as you are then you are very unlikely to see them as a PLY and you are less likely to trust them as a result.

Organizations might therefore be much better off with a less well paid CEO even if this person creates less dazzling business strategies since at least people will be more committed to support the strategies they do come up with and a well implemented average strategy is much better than an amazing one which is left on the shelf!

This is the reason that Whole Food Stores limits the reward of its highest paid executive to just 14 times that of its average employee.

It is also why increasingly organizations need to take not just a human capital based perspective to talent management but a social capital based on as well.  In this perspective there is no point undertaking reward or any other talent management process which increases human capital if it destroys social capital in the process.  This does not negate our increasing understanding of a growing gap between the contribution of high and low performers  but recognizes that this difference is often the result of relationships with and the support of other people.

As well as reducing pay differentials I would expect to see the coverage of benefits and share schemes being extended so that all staff including executives are rewarded in the same sorts of ways, even if the proportion of these, compared to other total rewards, varies according to position.

I'll be featuring more comments from my chapter on Reward and reviewing chapters from the rest of the book covering over areas of Talent Management over the next few weeks - check back soon.

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