A series of recent events, where investors have rejected executive pay packages means that this thorny subject is at the top of corporate agenda. Is the ‘shareholder spring’ a blip, or will it herald a change in executive pay?
Senior executives work extremely hard for many years to even be considered for the top roles, and once in the top job they have to perform at a continuously high level. Despite the populist view, the modern CEO does not sit in an ivory tower, handing down judgements, but instead has to solve complex problems and issues, respond in an extremely timely fashion to various demands, and deal with huge amounts of pressure.
Then there’s the notion of a work / life balance. In my experience, there isn’t one for a CEO due to the unwritten rule that you are available at any time to deal with your responsibilities and answer questions. Your mind has to be on the job every waking moment, seven days a week, and so-called social engagements, in reality, are business meetings in informal settings.
In essence, the limited personal time you have is frequently interrupted by the pressures of work.
Apologising to your spouse for being late to yet another dinner party; cancelling social arrangements with friends at the last minute; gabbling on a mobile phone while trying to watch your kids play sport; interrupting family holidays for crucial meetings, or conference calls throughout the weekend are everyday occurrences for a senior executive or CEO.
But beyond that, I’ve known CEOs of companies to joke in private that they don’t feel ‘chief’ at all – meaning they’re not really in charge as they have numerous internal and external stakeholders they have to keep happy. Nor do they feel ‘executive’, as every big decision is subject to consultation, negotiation and personal risk management: in the corporate boardroom a decision that turns out to be the right one is a team effort, the wrong one is normally labelled as someone’s fault. Like Premier league football managers, the average tenure of a CEO is getting shorter and if you make too many mistakes, you invariably end up with the opportunity “to spend more time with the family.”
There is no question executives perform extremely demanding jobs, and arguably the job at the moment is more challenging than it has ever been. But should their pay packages continue to grow, while the UK is in double dip recession and the Eurozone is at risk of unravelling?
CEOs, and the committees of executives, that calculate and agree the total remuneration may say yes, as they expect to be compensated for their hard work, diligence and for the personal sacrifices they are making.
Meanwhile employees, partners, customers and shareholders are increasingly, and more vehemently, saying no. Why the divide?
Semantics aside, the term ‘compensation package’ doesn’t help. The packages enjoyed by a senior executive, which typically consists of a salary and benefits, performance bonuses and the award of shares, are becoming increasingly detached from the hard reality the majority of the working public face. The typical employee is expected to work harder for the same salary, which is in real terms diminishing owing to inflation, and this is flaring a sense of injustice.
In most companies, the ratio of pay between the average worker and the CEO has widened in recent years. While most people’s wages are on the frozen plateau, executive pay keeps on rising well above the rate of inflation. Those working in financial services will also argue that the bonus is an integral part of the package and is sacrosanct, regardless of whether the company is making a profit. RBS, for example, which is 82% owned by the taxpayer, reportedly paid out £390 million in bonuses, even though it made a loss of £2 billion in 2011.
Now, more than ever, we need executives to be rewarded on the basis of the value and results they generate for the organisation and its stakeholders. Most employees – from the shop floor to the boardroom – will agree that the best aspects of any job is being part of an organisation that has a defined vision, has a clear sense of purpose, delivers consistent results and rewards everyone for their contribution to success. Some of the great success stories of the last decade, such as Google and Facebook, have demonstrated how effectively this ethos generates value.
The focus on short-term performance and the mechanism of compensation culture has eclipsed the most important executive attribute: leadership. Good leaders define an objective, develop strategies, implement their plans and ensure results are delivered. Along the way they listen, learn and earn the respect of employees, who in turn become progressively more motivated to focus on what can be collectively achieved, rather than aspiring to a measure of who works the hardest to achieve a set of nominal metrics.
In the next few decades, companies will need to manage an increasingly complex globalised environment. To deliver sustainable success, I think it’s necessary to embed a resilient culture that encourages innovation and taking calculated risks. Such things are not always easy, so above all executives need to build and lead strong teams that trust each other to overcome the risks and share in the rewards.
To achieve success, CEOs will have to ask their organisations to accept a high degree of change. To have any degree of credibility, executives have to show they are open to change. And this process starts with their pay packages, which need to provide reward for sustainable success, and not just compensation for the stresses and strains of office.