How to solve a problem like executive pay

Recognising there's a problem is only half the battle.

by Adam Gale
Last Updated: 16 Aug 2017

Executive pay makes for a reliably good story: it has injustice, excess and the chance to nose around the private lives of the rich and powerful. While the examples and statistics in the story change somewhat, the story itself never does: your CEO earns ridiculously more than you do.

‘Something should be done,’ the populists cry. But what exactly? It’s fairly well established that CEOs shouldn’t get 160 times more than their average worker (or, in the case of the top 500 executives in America, 949 times more), both morally and because of the effect it has on a company’s morale and reputation. But that doesn’t make it any easier to do something about it.

The general argument for retaining the status quo is as follows: the market for top executives is a market like any other, and a global one at that. It would consequently be suicide for a firm to slash its remuneration unilaterally. The CEO would simply leave for a better paid position, followed shortly thereafter by a mob of middle and senior management, who now realise there’s no prospect of earning big bucks at the firm.

The loss of talent would hobble the company’s performance in the long run and crash the share price in the short. What board of directors would vote for that, unless all its competitors did first?

It’s open to debate how accurate the assumptions behind that argument are. Top executives can’t always switch sectors that easily, for instance, and performance-related pay often unintentionally creates dysfunctional incentives (bankers’ bonuses circa 2005, anyone?). Besides, the performance of the business isn’t entirely in the CEO’s hands – it’s a team effort, in unpredictable external conditions.

In any case, it is the perception among both executives and shareholders, and ultimately that’s what counts.

So far, attempts to rein in runaway executive pay have focused on using transparency rules to create public pressure while empowering shareholders – many of whom are frustrated that pay has risen in recent years, as performance flatlined – to do something about it.

A government green paper last year called for binding shareholder votes on executive remuneration to occur annually, as in France, rather than every three years as currently happens in the UK. The Investment Association, meanwhile, has attempted to create a common position for institutional investors who’d like to see pay become less of a reputational risk, and better linked with performance.

That will all help, but so long as the doctrine of shareholder value persists, it will always make sense to incentivise CEOs with more dosh. The potential gain for investors is far greater than the cost.

Purpose is therefore an obvious antidote. If companies look at stakeholder value rather than just shareholder value, then the views of customers and employees count for more. 

A flourishing of purpose wouldn’t necessarily bring CEO pay crashing down, of course (Unilever’s a very purposeful company, yet that didn’t stop Paul Polman raking in €8.4m last year). Money will always be a motivating factor, but perhaps especially in a purposeful company, it doesn’t have to be the only factor. 

The more a leader cares about achieving something bigger than themselves, together with their employees, the less it will matter whether he or she rakes in £2m or £10m. Money isn’t everything, after all. 

Read next: Britain's bosses just took a 17% pay cut


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