How soaring executive pay affects corporate reputation

Do people really care if a CEO takes home megabucks?

by Ed Coke
Last Updated: 05 Sep 2016

The perennial issue of excessive executive pay has recently come back into focus in the UK. While the topic is nothing new, the accelerated gap between those at the very top of FTSE 100 companies, the pay of their workforces, and the median income of the UK general public is greater than ever. 

The political momentum injected by Theresa May’s statements on corporate governance reform could now see more urgency in addressing the issues thrown up by ‘super-salary’ board-level compensation.

Many companies are now asking themselves how reputation fits into this thorny issue. Reputation leaders – which we define as senior-most corporate communicators, public affairs professionals and board members responsible for reputation strategy - clearly recognise the potential by-product of reputation risk associated with negative headlines around shareholder rebellions over excessive remuneration at AGMs.

Recent research conducted by Reputation Institute shows that 63% of global reputation leaders describe themselves as ‘very involved’ in managing their CEO’s reputation. Among external stakeholders, the success and visibility of CEOs and other senior corporate leaders is important; leadership influences overall perceptions of reputation by 12.5% among the UK general public.

However, reputation is a holistic concept. High quality products and services, openness, fairness and transparency in business conduct and corporate citizenship all have higher impacts on overall reputation than leadership alone.

And herein lies the rub; the impact of excessive executive pay on overall reputation does not have to be negative. Entrepreneurially-driven companies such as Virgin Group or Dyson have very highly-paid CEOs, and also strong reputations. As with highly-paid sportsmen and women who get results for their team or country, typically, the UK public thinks ‘fair play’ to those like Sir Richard Branson or Sir James Dyson who have taken their own personal risks, reap the rewards, yet also have good reputations for treating their employees well.

This risk/reward chain is more challenging to communicate in FTSE 100 companies, but not impossible. Sir Martin Sorrell’s WPP earns a strong reputation from UK General Public, despite Sorrell being the highest paid FTSE100 CEO. That’s because, corporately, WPP has worked consistently and openly in drawing a clear link between the long-term performance of the company, the risk the CEO undertook in securing a strong future for the firm, and the personal remuneration received (it also helps that Sorrell is the company’s founder).

When this linkage is either not communicated effectively, simply not present, or other reputation issues should inhibit a large CEO pay award, reputation can suffer. BP’s reputation remains overshadowed by Deepwater Horizon; Sports Direct is clouded by questions over corporate governance, and Reckitt Benckiser has been the subject of regulatory investigations regarding Nurofen pricing. In these instances, the scrutiny behind CEO compensation has become intense and negative.

If companies genuinely want to step up to the new challenges laid down by Theresa May’s government on transparent corporate governance, they should start by communicating their CEO and broader corporate narrative, showing the accountability within the organisation, and monitor the wider reputational context so executive pay does not side-swipe their agendas in future.

Ed Coke is director of consulting services at the Reputation Institute


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