The thorny subject of executive pay has once more returned to the political centre stage. Many politicians have accurately defined the problem but no-one seems to have a sensible solution. Most seem agreed that there is little wrong with high rewards for good performance. This, of course, does nothing to reduce the excesses of high pay and certainly doesn’t address the definition of what good performance actually is. For instance, many acquisitions that produced significant returns in the short term proved to be disastrous, but few compensation packages allow for claw-backs.
One of the problems in trying to find a solution is everyone’s at it. It’s not going to be easy to find brave souls who are prepared to start a race to the bottom. Few boards are going to suggest that they set an example for others to follow. It reminds me of a poor chap who’d brought his young son to a rugby match at Twickenham. Every time anything of importance happened the crowd would rise to its feet leaving the little lad unable to see a thing. The increasingly exasperated father was imploring the crowd to stay seated and to pass the message around the rest of the ground for the benefit of others. Needless to say he wasn’t successful.
So what is the solution? Well, apart from banning “reward” experts (who tend to perpetuate myths, thereby creating an arms race of increased compensation) maybe it is time to reframe the issue. Rather than pay per se being the problem perhaps it is the focus on shareholder value that is wrong.
The rise in importance of “shareholder value” came about for all the right reasons. Too many businesses were inadequately focused on their investors. One of the solutions was to ensure that senior managers had “skin in the game” and so share schemes were introduced to “align” their interests with those of the shareholders. And this is where the law of unintended consequences came in. Many shareholders became too obsessed with “extracting” value from their investments and on the share price (especially when the new game of lending to hedge funds came in) Senior managers often became too focussed on creating value for their shareholders and, despite some attempts to shift reward towards the long term, were led towards making decisions that would prove unsustainable. For instance, buying growth and cutting back on training and investment can be a good way to increase Earnings per Share (EPS is still a key determinant for many executive reward programmes) but it will rarely build long-term success. And so we find that the needs of the shareholder (to extract value) and of the business (to provide excellent and differentiated service to its customers) can be at variance.
For me the key to reducing the excesses of executive pay has to be to decouple reward from the shareholder’s interests. The first step would be to reduce the amount of shares that can be granted to executives (Bart Becht, in his last year at Reckitt Benckiser, earned £4.5m from salary and bonus and then picked up £90m from his share schemes. Some would say that what’s right for the shareholders in right for the business, but when the ratio between basic pay and share rewards is a wide as in this case it is easy to see how some may get their priorities wrong).
The second thing must be to reframe the definition of success towards customer and employee satisfaction. Organisations need to return to the good old days when the focus was firstly on delighting the customer, and then on investing in the interests of employees, other stakeholders and society at large. It followed that if those priorities were satisfied then the shareholders would be happy and would share in the success.
Naïve? Maybe, especially in a global market, but long-term success comes from investing in people, playing a part in society as a whole, and, most importantly, in offering great service. Creating rewards for the right things tends to lead to the adoption of the right behaviours.
And as for the rugby crowd? Well, rather than trying to get everyone to sit down how about a return to the old days. Take out the seats, stick the youngsters at the front, and bring back the great atmospheres of the past. The days when the unsegregated crowds would commiserate with the losing supporters by generously sharing with them, in the immortal words of Max Boyce, “…that old bottle that once held bitter ale.”