Executive and Board Pay – Is There an Appropriate Level?

Once more the level of pay of senior executives is under scrutiny and proposals are being considered for influencing and containing the size of such pay packages.[1]  This topic has attracted attention across the years and has been the subject of many studies.  I had the privilege of discussing and corresponding with the late Dr Tom Paterson on the issues of pay equity and equitable pay differentials.  Many will link Dr Paterson’s name with the Decision Band Method™ of job evaluation but miss out on why he developed that approach.  It was an outcome of his work on pay equity and organisational issues within public and private sector organisations.   Dr Paterson developed an approach to reward structures which linked the way in which basic pay levels could be set in relation to each organisational band and level.

He accepted that as organisations developed more complex group structures etc., those would strain traditional job evaluation methods and differentials in pay, so he began to examine pay equity concepts and approaches.

Legitimising Appropriate Behaviour? 

Over the years, senior managers have been subject to performance measures to try to align their pay packages with beneficial outcomes for their organisation.  The issues of short term v medium term performance surfaces regularly.  Effective solutions appear difficult to devise or apply to overcome the short term effects of such performance schemes whether those are share based, cash based or comprised of deferred bonuses and measures such as shareholder value.

Some schemes are designed to justify the levels of pay by setting criteria which may seem to commensurate with the payments.   As we know well, performance/incentive schemes legitimize certain types of behaviour to attain the ‘set’ outcomes.  Such behaviours may be detrimental to medium term performance.  To address that, qualitative performance measures are added such as customer satisfaction or retention in an attempt to curb undesirable behaviours.  However,  that often leads to multi factor complex reward schemes which the Board then find difficult to adjust to meet market or internal circumstances.  That was especially so when the trend started in the USA to reduce basic pay to a much smaller percentage of the total reward pot and increase the performance related element by a significant amount  That spawned a whole host of new performance measure schemes which made the task of  Boards even more difficult to align the required outcomes with acceptable behaviours in pursuit of bonus objectives.

There is another aspect which has been pushed aside by the cry that, “we must be seen to justify the level of pay by the criteria being met”.  The reality is that at board and senior management levels, market forces play a significant part.

Market Rates of Pay

Organisations want to attract and retain executives who will add value while steering the organisation through the constant changes to their markets, competition and their regulatory context.  Rather than distort internal pay relativities and introduce complex bonus schemes, it may be more open and effective in the medium term to recognise that a large element of the reward package of a senior executive is market related.   The market rate is not just affected by the industry/service sector in which you operate  but also by the type of skills and exposure of the top executive that you wish to attract and retain.

Market rates can be adjusted up or down to reflect changes and need not end up as a permanent on cost when the circumstances change.   I shall return to this topic in a later article.

Equitable Pay for Top Management

Some commentators believe that the Government may be tempted to introduce more laws etc. to govern companies.  This was mooted similarly when the issues of the abuse of zero hours contracts arose in the Sports Direct scenario.  We shall be writing an article(s) about the Government’s green consultation paper on Corporate Governance Reform.

Over the years, we have also published various articles on pay equity and equitable differentials.  As the subject has arisen again, I have given links to some of our earlier articles:

Equitable Approaches to Boardroom and Senior Management Pay

Senior Management Pay – Equitable Differentials

Management Bonuses – What Should They Reinforce?

We trust you will find those informative and that our future articles will also provide food for thought and action points for Boards to consider.  So that you can keep up to date with the articles we publish, you can receive notification of new articles by e-mail – see the section in the right hand column of this article page.

References:

[1] CORPORATE GOVERNANCE REFORM, Green Paper issued by the Department for Business, Energy and Industrial Strategy November 2016.

[2] Julies Samuel VIEWPOINT, ‘May is wrong to believe more rules are needed to govern companies’,   Daily Telegraph 02/12/2016.

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