I had fond hopes that the kerfuffle about executive pay might have brought more principled debate and courageous decisions to the Board tables of our largest companies.
The idea that obscene amounts of money incentivises already committed and values- driven executives to achieve more than they otherwise would, is nonsense. The sooner Boards face up to it as self serving, special pleading the better. It’s not an overly significant or complex problem. Without being simplistic, all it requires is some leadership and sound thinking to create a new pathway for responsible and sustainable remuneration practices.
Those who argue it is, at least in part, “compensation” for things like uncertain tenure should be met with the same insights that apply to ordinary wage and salary earners: fair pay stabilises tenure for all. Others argue about CEO and other senior executives’ remuneration needing to reflect what is paid in international markets; bad international practice doesn’t justify bad domestic practice.
If there are resisters and counter viewers, let them present some evidence that current remuneration policies do really create additional discretionary actions that actually deliver leveraged value. And even more, that these often enormous amounts of additional pay above base create intelligent action that would not otherwise have been initiated but for these payments.
For 50+ years organisational experts have accepted that money is not a motivator, except to the extent that unfair remuneration is a de-motivator.
Remuneration needs to be a measure of the value that the incumbent in a role brings to their organisation’s success and sustainability.
Those who are seized with the realisation that these currently obscene and unconscionable practices need to be addressed and know that they are accountable for doing so, seem to be struggling with the competence issue of how value can be reasonably measured.
There are many ways to assess value and there are some industries and professions that may be able to argue special cases for how they measure it; but for the vast majority, Boards need to do some hard thinking and reflection about the value that the CEOs and Executive Teams create.
They also need to be aware of the increasingly insidious cultural practices that they are contributing to by sanctioning and defending these remuneration processes.
Boards need to remember that employees outside the executive teams see these manifestly unfair outcomes and can be forgiven for thinking that their only recourse is to adopt similar self-serving behaviours themselves.
These reflected behaviours apply to employees at various levels in organisations, as well as contractors, advisers, and other service providers.
The underlying philosophy that develops from these indefensible remuneration excesses in the top echelons is: if its good for the goose, its good for the gander.
How can value be measured?
One simple, but not simplistic, way is as follows:
If I have a paddock and I agist a horse on it for $50 per week, I can assess the value of the paddock in two ways: one is the revenue it creates i.e $50 per week. A second is the capital value. If I had $50,000 dollars and I invested it at 5% it would earn roughly $2,500 p.a or $50 per week. So, the capital value of the paddock might be said to be $50k.
On this logic, an executive who earns $1m p.a. would have a capital value of $20m. If they can demonstrate what they have done to create that value, they would be worth that pay.
If it is a team effort, the results need to be shared on the same basis.
So, if a large organisation creates $100m of added value, a pool of $5m would be available for the total remuneration of all involved i.e. from the cleaner to the CEO.
The percentage used in the calculation might be the same as the rate of return for shareholders in that company in the previous year or an average of the past three years or the like, or it might be based on another shareholder relevant measure.
By some careful thought, remuneration for executives can be more closely tied to their real value. A “bonus” (pardon the pun) might be that remuneration is paid in ways that reflects sustainable performance and avoids the nonsense of short and long term incentive payments and the fashionable but illogical approach of deferring pay.
Paying on the basis of market rates, comparable skills assessments, years in a role or profession and the like are all outdated, unwieldy and unworkable. In the digital, automated age we now are in, added value is the only measure.
How “Value” is defined needs careful thought by Boards. The same thinking that they apply in determining arrangements for their CEO needs to apply to the whole organisation, not least themselves.
Only a couple of years ago, executive pay and CEO pay in particular might have been addressed by Boards as an issue related to workability: i.e. what do we need to do to get an acceptable outcome in all the circumstances? Today, it is a moral issue.
If it is confronted as a moral issue, Boards will make a considerable (even valuable) contribution to restoring trust in their organisations, promoting a healthier working environment for employees at all levels, reaffirming their mission as stewards of the organisation, recreating pride, as well as addressing the fear and ennui that is such an unacknowledged attribute of organisational life for too many at present. This is a question of leadership.