Executive pay and termination packages have become a focus of public attention. Just ask Ahmed Fahour, CEO of Australia Post.
Here at Optimum we have had numerous requests in the last quarter to look at remuneration and have used our survey tool EmployeeLife to help collate some quantitative and qualitative data to help ascertain employees’ motivation in regards to remuneration structures, so first hand we know this is high on the agenda…
It is simple really, take Australia for example; the vast majority of people have a vested interest in what companies are reporting and how they are performing financially due to compulsory superannuation policies. We are all investors!
In a downturn economy where shares are decreasing, where profits are on the downturn this breeds questions as to why Executives are getting paid what they do!
In Australia: 9 in 10 adults believe that Chief Executive Officers (CEOs) get paid too much; 79% believe executive salaries should be capped; 4 in 5 believe high executive salaries do not increase company performance; and almost two-thirds of people believe high executive pay leads to higher risk taking (Colmar Brunton 2009; Ferguson 2009).
Real CEO pay grew by nearly five times during the period 1971-2008, whereas real average weekly earnings grew just over 1.5 times over the same period (calculated from Noble Lowndes Cullen Egan Dell 1994; Shields, O’Donnell and O’Brien 2003; Egan 2009).
So how do Executives get paid and who makes the decision in regards to their remuneration packages?
The press and some politicians tend to compare the compensation of corporate executives with the pay received by the average worker.
Corporate boards and compensation committees typically benchmark “peer group” pay; they compare their CEO’s package with that offered to his or her peers at competing companies.
Board members also go beyond benchmarking, and instead use multiple lenses to evaluate compensation via a more complex and rigorous assessment of both internal and external factors.
The Productivity Commission (Productivity Commission 2009) argued that in aggregate ‘executive remuneration has grown at similar rates to company performance’ as evidenced by the fact that ‘executive pay has tracked the (ASX) accumulation index’ with ‘a strong correlation between pay and company performance’.
However, this is changing…
‘Productivity’ theories explain this growth in terms of the economic performance of CEOs: it is simply the CEO’s fair share of the corporate performance they deliver.
There are several aspects to take into consideration in the modern world:
- Complexity: A ‘complex job’ variant posits that the work of CEOs has become relatively more complex in recent years, requiring higher levels of skill than previously.
- Globalisation: With globalisation, the market for senior executives has also globalised in recent decades, so that Australian firms now have to offer higher remuneration to attract or retain CEOs.
- Volatility: With volatility and huge change across all sectors, board members must determine the goals it has for the CEO and how it will measure and reward that person for achieving those objectives and milestones. It must also factor in any challenges associated with the role and evaluate the differences and expectations of the CEO relative to the market, such as needing to turn around a struggling business.
- Regulation: Today there is simply more compliance and regulations to consider, influencing the strategic decisions of some.
- Individuality: Personal motivations must also come into play: will an executive thrive on a low-base salary, with high potential payouts from incentives, or would a more balanced pay program be more compelling?
In my view, compensation has to be related to the productivity that the executive provides the company; they get paid for their performance. If the company does not perform, should executives be rewarded by a bonus or extra shares? My thoughts are clear: NO!
I also believe remuneration needs to be created in the context of how others in the organisation are paid: you need neutral metrics, team-based metrics, designed by boards that have long-term interests in the health of the company; this, however, does not only apply to CEO’s. They are not the only people who make a corporation profitable – all a corporation’s workers contribute to its profitability, and if it becomes more profitable then shouldn’t all employees benefit?
Culture is getting a lot of publicity at the board level, and rightly so in my opinion. Culture has to come from the top echelons of an organisation. Board members and CEO’s should know what their front-line employees are thinking, saying and doing. If a toxic culture exists, your employees will feel it and your customers will feel it.
The world of Executive remuneration is changing – let us see what morphs in 2017 and beyond!
Stephen Cushion – General Manager; Consulting