Shareholders Revolt: A reality check?

Deborah Nielson, Head of Compensation Research at Kenexa, looks at the impact of recent shareholder revolts over executive pay.

by Deborah Neilson
Last Updated: 23 Jul 2012

Over the last week we’ve seen a rise in shareholders fighting against the tide of soaring executive pay; Barclays, Aviva and now WWP have all come under the spotlight and today Aviva’s investors have voted against the latest executive pay deal.  In the midst of all this, WWP have announced that they’ll undergo a "fairness review" of remuneration; something they hope will put an end to disgruntled staff and shareholders.  

We’ve become accustomed to the Governments attempts to counter balance executive pay but this revolt by small shareholders signals a new chapter in the story.  It’s clear that staff and shareholders are reacting against the unfairness of the huge gaps in remuneration and attempting to put a stop to it.  

Kenexa’s most recent WorkTrends survey indicates that 45% of employees in the UK do not believe that they’re paid fairly. Although this is in line with global norms, it begs the question why over half of the workforce has concerns over the validity of their compensation. Are these employees, in fact, paid "unfairly"? Most likely their pay has been determined using "fair" methodologies and proper statistical rigour, but they perceive the end result to be unfair. 

When an employee feels that his or her compensation is unfair, he’s most likely comparing his compensation to that of a peer or supervisor. While there are a number of valid reasons why pay for individuals in similar roles may be different (experience level or performance level, for example), most employees have difficulty seeing past the numbers. Pay is often interpreted as a measure of self-worth, and can be a deeply personal and even emotional topic for many.

But clearly the issue of fair pay is not limited to comparisons between peers.  As we’ve seen this week, comparing an "average" employee’s pay to that of an organisation’s most highly paid executive also raises questions of fairness. Barclays, Aviva and WWP are certainly not alone in facing this issue –  in the U.S. similar shareholder pushback on executive pay over the past several years has been answered with a host of new regulations designed to drive shareholder visibility into remuneration decisions. 

Although the impact of the U.S. regulations has yet to be fully understood, it’s clear that the presence of requirements like the "say on pay" vote (a non-binding measure of shareholder approval for executive compensation packages) have driven some positive changes in executive remuneration practice, including clearer  illustration of the linkage between executive pay and company performance. Some organisations have even made changes to the pay mix and pay triggers for executives – increasing the proportion of compensation at risk, clarifying performance metrics, and eliminating perquisites likely to be viewed as exorbitant. 

So why is the mere perception of "fair pay" an important consideration for organisations? Kenexa research shows that employees who believe that they’re paid fairly tend to be more engaged than those who don’t – and organisations with more engaged employees outperform their peers on several key financial metrics. In addition, employees who do not believe they’re paid fairly are also far more likely to leave their organisations than their "fairly paid" peers. Hence, the perception of unfair pay can lead to the reality of poor business outcomes.

The good news is that employees who understand how their pay is determined, see the connection between their pay and their performance, and understand how they can work to maximise their pay tend to view their compensation as more "fair." An investment in communication and education around compensation can therefore yield large dividends on the employee engagement and retention fronts, which ultimately impact overall company performance.  It waits to be seen if this weeks shareholder revolt will have any meaningful long term impact on the approach big businesses have on their pay practices.

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