Week in Review

No CEOs were harmed in the writing of this column

Rob Campbell argues he and his fellow company directors should take responsibility for allowing CEOs and pay consultants to ratchet up executive pay much faster than workers’ wages.

If I have aged too young the blame lies with too many hours of board discussion on executive remuneration and incentives.

Until recently I blamed executives who could put any cloth-capped trade unionists from the 1950’s to shame on “relativity” arguments, or their close comrades the remuneration consultants. But I have now reached the conclusion that the real problem lies with me and my colleagues.

It is widely and rightly observed that top executives have had a very good run in recent times, although less in this country than some others. When incentive rewards are added in (and they routinely are) there would be few large companies where executive reward growth did not compare very favorably with the wider workforce or directors, not that anyone does or should care about directors.

This has occurred despite no evidence that there is a strong relationship between higher senior executive pay as a predictor of financial performance. I have not seen any studies but it would come as a great shock if there was such a relationship when applied to wider social or sustainability outcomes.

You can really only blame boards for this. We are not, or should not be, meekly helpless at the hands of advisors or persuasive executives, be they applicants or incumbents. After all we, by and large, manage to keep total labour costs under control.

I don’t understand why we seek out highly skilled and motivated people for these jobs and then treat them like a piece worker in a nineteenth century cotton factory

Senior executive incentive packages today are drawn from a pretty common gene pool but display a dizzying array of minor variations. Much time and effort is spent on defining and refining various targets and hurdles. Not unsurprisingly the common outcome is that significant proportions are paid out after often only modest performance.

The basic idea is that the system of incentives should align senior executive actions with the business plan and with shareholder interests.

It is not hard to see the potential flaw with the first part of that. If a significant part of the potential pay for senior executives are is driven by achievement of a business plan, they would be extremely dumb or altruistic if they did not try to ensure that the plan is within reach.

Alignment with shareholder interests is important but a much more direct way to achieve that is to require senior executives to hold significant equity in the business. It is patently obvious that an alignment is much less rigorous where that equity is gifted, funded or earned by targets at least partly influenced by the recipients.

You can no doubt see why I have become a bit of a nuisance on remuneration committees. Experience has got me to the point that we should pay senior executives well, set clear and high expectations, and change them if they fail. Risk of inability to perform is pretty well met by executive salary scales.

I don’t understand why we seek out highly skilled and motivated people for these jobs and then treat them like a piece worker in a nineteenth century cotton factory who is deemed only likely to meet production targets by micro targets.

If this is not the case and we are appointing people who do need to be specifically rewarded for doing aspects of their job as one might when training a young dog with treats then I suspect we are making a big mistake.

Increasingly the right leaders of a business are there because they want and are challenged by the role. Yes they will want a reasonable reward for that. But the breadth of their skills and personal objectives should be such that they will not want or respond to these schemes which assume they are just narrow focused reward seekers.

In a number of places it has been proposed that public companies should report CEO/worker earnings multiples over time. While there are some calculation issues I see no valid reason not to have such data reported consistently as it should be, for example, in terms of gender pay equity.

If a board genuinely thinks that an incentive beyond equity ownership is required then it should certainly be based on long term sustainable outcomes and paid out over a sufficient period to properly reflect such outcomes.

The fault lies with directors. It’s something we all need to think about. Start with how we think about the job. Then how we think about the real attributes we need. And get off this escalator of rewards which are seldom really fit for purpose.

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