Grasping the nettle of executive pay

Rebuilding the trust
Nettle by Steve P2008

There have been two events in the last week seeking to grasp the nettle of executive pay;

Each comes from a different angle but draw similar conclusions:

  • There’s confusion over whether the intention of high pay is to incentivise high performance or to reward past achievement
  • There’s little evidence of a link between organisational performance and executive pay
  • Few organisations have good data on performance and so the link with pay becomes confused. Meaning that both absolute and comparative pay can be seen as unfair
  • High pay can make executives too bold, taking short term risky decisions
  • Remuneration Committees (RemCo’s) should focus on performance rather than market data
  • Performance should be wider than the financials including measurements of culture, engagement, sustainability etc.

Insight

At the HPC, Prof. Furnham provided some interesting insights from research. The things that stood out for me were:

  • £75,000 is regarded as the threshold for pay as above that you get no more motivation for every pound spent
  • Executives soon adapt to high pay levels so in order to keep incentivising you’ll need deep pockets
  • Intrinsic rewards such as purpose, autonomy and mastery (Pink) are greater motivators than pay
  • Pay transparency is a conundrum; it can lead to disillusionment as executive’s compare against their peers unless performance measurement is robust, equally transparent and the link to reward is clear

All prompting a healthy discussion in the room.

Governance

The IBE seeks to give RemCo’s a framework to guide their thinking on executive pay focussing on:

  • Culture and behaviour
  • Defining the purpose of reward
  • Truly understanding the quantum of packages
  • Having solid performance measures

This should enable them to explain and justify any package.

Laughter and disbelief met Google’s Matt Brittin when he told MPs that he didn’t know what he got paid.  It was seen as another example of excessive executive pay and fed the mistrust of corporate business.

Perhaps reform of RemCo thinking supported by greater insight into the psychology of reward will be the first steps to rebuilding that trust.

At Verditer we support Remuneration Committees in all areas of executive pay. Contact us to find out more.

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Image courtesy of Steve P2008