Executive Pay: The Subject Which Must Not Be Named

It’s the week of the annual CIPD conference, where the great and the good of the HR world get together to “learn from best practice examples from leading organisations ... pick up practical tools that you can implement right away in your organisation... and hear the most current thinking from high quality speakers who have been there before.”

And with split second timing, one of the most high profile members of the profession makes a public attack on the excesses of executive pay, saying that “top pay has been found to bear little or no relation to company performance”

He goes on to say that, “Perhaps it would help to make directors and CEOs more accountable to their employees. Perhaps there should be employee representatives on company boards.”

Great to hear a prominent member of the HR profession to be making a public statement on such issues, isn’t it?

The only problem is, that this comment doesn’t come from any member of the HR profession. It comes from John Sentamu, the Archbishop of York.

Let’s look at what the Archbishop says in a bit more detail:

The news that Chief Executives (CEOs) of the FTSE 100 companies last year received average pay increases of almost 50 percent adds urgency to our cause. Typically these CEOs receive 300 times as much as the least well paid British employees in their companies. If they have a responsibility to their staff, it is hard to imagine a more powerful way of telling some people that they are of little value than to pay them one-third of one percent of your own salary. Top pay has been found to bear little or no relation to company performance, but even if it did, isn’t the performance of a company dependent on the work and wellbeing of all its staff?

Do you have to be a senior cleric in the Church of England to realise that paying some employees one-third of one percent of the salary of the CEO of an organisation is blatantly unfair and unjust? I think not.

But is this an issue that the HR profession seems to be happy to tackle?

Judging from the timetable for this year’s CIPD Conference it would appear that the subject of executive remuneration is the HR equivalent of Lord Voldemort: The Subject Which Must Not Be Named.

If you’re interested in Talent Management, Delivering Organisational Effectiveness or Building a Culture of Engagement and Leadership, the conference will have you feeling like a kid in a sweet shop. But if you’re looking for some open and frank discussion about the issue that has got the rest of the population gossiping, you are searching in vain.

OK, as an HR professional with a degree in Theology, I’ve probably got more in common with what Archbishop Sentamu is saying than many of my colleagues. But the question I’d like to ask is this:

If as HR professionals we’re not addressing this issue, who else is?

Come on, HR people! How about responding to this challenge of the Archbishop of York:

Our society will work best when we recognise that as human beings we are all, fundamentally of equal worth and members of one society.

Let us do it. Let us do it now.

Your comments are, as ever, most welcome

Missing, Presumed Dead.

Scotland Yard have today announced that they have called off the investigation into the apparent disappearance of eight UK Business Executives, many supposedly drawn from the HR community, who have been reported as missing over recent months. A spokesman for Scotland Yard said that an evaluation of the evidence had led to the conclusion that none of these individuals had actually ever existed in the first place, and that they appeared to be some form of Urban Myth. Scotland Yard have, however, released details of the “missing” persons, and stated that in the unlikely event that any of the following individuals are sighted by members of the public, they should contact their local police station.

The Eight Mythological Executives are:

A banker who has left the UK to work overseas as a result of the pressure on the financial community to control remuneration.

An HR Director who argued that Executive bonuses unfairly rewarded those at the top of organisations while penalising those lower down.

An HR professional who believed that their company’s performance management system was actually a little bit too simple.

A Learning and Development Manager who could state with absolute certainty how much money his company had spent on training last year.

An HR professional who can point to an incontrovertible link between training activities and an increase in company profit.

An HR Director possessing empirical evidence that there is a direct link between large bonus payments for senior managers and financial performance.

An HR Director who yearns for the day when his function will be rebranded as “Human Capital.”

An HR Director who believes that she has better control over her function now that all transactional activities have been outsourced.

Readers of HR Case Studies have been asked to assist Scotland Yard with their enquiries. If any of you believe that you have ever seen any of the above individuals, please leave a comment below.

A fair day's wages for a fair day's work?

The issue of the excesses of executive pay has featured many times in the pages of this humble little blog. But an article in today’s Guardian once again turns the spotlight on this crazy situation.

I defy you to read some of these facts and not feel some sense of injustice!

• The average income of a FTSE 100 chief executive is over £3m per year, including bonuses and pension contributions. This is more than 100 times median household income.
• It is not uncommon for CEOs to earn 200 or 300 times as much as the average pay of their employees.
• In Terry Leahy's final years CEO at Tesco, he was paid 500 times the average take-home pay of his colleagues.
• In the year to September 2009, the FTSE LOST a third of its value. During the same period of time, executive pay ROSE 10%  
• In 1980, the average pay of a UK CEO was ten times that of average UK earnings. By 2006, the average pay of a UK CEO was 75 (say it out loud and think about it ... seventy-five!) times that of average UK earnings

So what can be done about such evident and surely unsupportable imbalances between those at the top of UK organisations, and those who work within them? Today's Guardian article offers at least one good suggestion:

One thing that government could do to shake things up would be to change the composition of remuneration committees, adding some broader and more critical voices to the mix and disrupting the complacent back-slapping. Ed Miliband's proposal for worker representation on remuneration committees would be a promising way forward. It would inject a dose of realism into the determination of corporate pay, as the presence of even a single dissenting voice could puncture group-think, and lead to pay policies that were broadly justifiable to all sections of an organisation, rather than only serving the interests of a self-perpetuating elite 

Further reading from HR Case Studies

 

Dutch knock out Scotland, and take the lead on executive pay

 

£36.8m. Not bad for a year's work.

 

Trade Unions add their voice to the chorus demanding an end to the bonus culture

Your thoughts and comments are, as ever, most welcome.

G20 leaders divided over "fat cat" pay

Previous postings on HR Case Studies have signposted this week’s G20 leaders' meeting in Pittsburgh as the time when new rules for bankers’ bonuses could be agreed and implemented. It currently seems as if Germany’s Angela Merkel (possibly influenced by this Sunday’s elections) and President Sarkozy of France are the leaders who may be prepared to take drastic action on “fat cat” pay. Britain and the US have been seeking a compromise to resolve the dispute over bonuses by proposing that banks which did not carry sufficient capital should be required to claw back bonuses. It also seems likely that the G20 summit will be in agreement over backing ideas such as clawing back pay in the event of poor performance, and paying some bonuses in shares.

G20 moves against bankers' pay and bonuses

• Place your bets now! Do you expect there to be any major changes to the payment of bonuses in the finance sector as a result of the Pittsburgh summit?

CIPD staff get pay freeze, CEO gets bonus. Hmmm!

As the major rival to the CIPD People Management journal, it will have been a source of glee to the Personnel Today editors to be able to report that although the CIPD has banned discretionary bonuses for employees this year because the organisation did not hit its financial targets, and froze base pay for the majority of its staff, it has emerged that CIPD Chief Executive Jackie Orme has received a bonus to top up her £300,000 per year salary.

The pay freeze was implemented to minimise the need for redundancies and to help finance a freeze in 2009 membership fees.

A spokesman for the CIPD told Personnel Today that the CEO’s remuneration package was smaller than that of her predecessor and that her performance was assessed against a scorecard of membership, financial, service development and strategic measures and targets. The launch of the CIPD HR Profession Map was highlighted as a major achievement over the last year.

CIPD branded unfair as chief gets bonus despite pay freeze

• Does the payment of a bonus to the CIPD CEO make it difficult for the CIPD to objectively enter the ongoing debate over CEO bonuses?
• Read Jackie Orme bonus row: CIPD official statement. Does this change the way you responded to the last question?

Archbishop attacks the bonus culture

Hot on the heels of the Trade Union leaders, The Archbishop of Canterbury has attacked the bonus culture of the City, and condemned the failure of bankers to repent for their excesses.

Dr Rowan Williams believes that the Government should have acted to cap bonuses and warned that the gap between rich and poor would lead to an increasingly "dysfunctional" society. His comments, which were made on the BBC 2 Newsnight programme, have been summarised in The Times.

Dr Williams said: "There hasn't been a feeling of closure about what happened last year. There hasn't been what I would, as a Christian, call repentance. We haven't heard people saying 'well actually, no, we got it wrong and the whole fundamental principle on which we worked was unreal, empty'." Looking to the future, he expressed his concern by stating, "What we are looking at is the possibility of a society getting more and more dysfunctional if the levels of inequality that we have seen in the last couple of decades are not challenged." He also said that the crisis was a lesson that "economics is too important to be left to economists". His interview also referred to a sense of "bafflement" and "muted anger" at the bonus culture. "I think that's one of those things that feeds the . . . diffused resentment, that people are somehow getting away with a culture in which the connection between the worth of what you do and the reward you get becomes more obscure."

Archbishop of Canterbury Dr Rowan Williams: bankers have failed to repent

• How do you think that the comments made by the Archbishop will be received in the City?
• There will be those who believe that finance should be left to the experts, and therefore do not consider Dr Williams’s comments to be useful or helpful. What’s your view?
• Concern over the salaries of Chief Executives and the continuation of the bonus culture has led to a number of comments being made about the morality and ethics of the UK finance industry. Should economics and ethics be kept separate, or is that simply impossible?

Trade Unions add their voice to the chorus demanding an end to the bonus culture

Speaking at this week's TUC annual congress, a significant number of major Trade Union leaders have declared their opposition to the bonus culture in both the private and public sectors. The most outspoken of the leaders was undoubtedly Gerry Doherty, general secretary of the transport union TSSA, who told delegates, "The bonus culture has no place in society. It's pure greed. This is wrong, it has to stop and it has to come from the trade union movement. Greed has to go and we have to tell the government that." Doherty highlighted recently published statistics that Thomas Cook's chief executive took home over £7m in 2008, while 2,800 employees lost their jobs at the travel company.

David Wilshire, of the Communication Workers Union also pointed his finger of blame at Adam Crozier, Chief Executive of Royal Mail Group: "It's unacceptable that while postal workers have a pay freeze imposed and are having their terms and conditions threatened, Crozier has enjoyed a payout of £995,500 in 2008-2009."

A call for head teachers' pay to be limited and to be made public was made by Brian Cookson of teaching union NASUWT. "Of course teachers must be properly remunerated, but can we say from the size of these salaries that it's more difficult to run a school that a country? The bonus culture has no place in the state education system. Pay and rewards of head teachers must be made public."

TUC Conference update: Unions call for end to bonus culture

• Which other organisations have recently called for bonuses and salaries to be restricted?
• Research activity: Which major companies are represented by each of the TU representatives who have called for an end to the bonus culture?
• Dodgy activity for teachers 1: compare the salaries of the different groups of employees within the education sector.
• Dodgy activity for teachers 2: compare the salary of a head teacher with that of senior managers in other professions.
• "Can we say that it's more difficult to run a school than a country" Explore the salaries of MPs and ministers in the UK government.

£36.8m. Not bad for a year's work.

Despite the current recession which has led to FTSE 100 companies losing almost a third of their value, executives at Britain's top companies saw their basic salaries leap by 10% last year. The most highly paid chief executive was Bart Becht of Reckitt Benckiser who received £36.8m in pay, bonuses, perks and share incentive schemes.

The Guardian's annual survey of boardroom pay reveals that the average chief executive of a FTSE 100 company now earns a basic salary of £791,000. However, adding bonus payments, share awards and the value of perks (which range from cars and drivers to school fees and dental work), the average pay package rises dramatically. Nearly a quarter of FTSE chief executives received total 2008 pay packages in excess of £5m, and 22 directors now have basic salaries of more than £1m.

Liberal Democrat Treasury spokesman Vince Cable called such pay deals "breathtakingly cynical," while Brendan Barber of the TUC commented that "it looks depressingly like we are going back to 1980s greed-is-good politics."

Executive pay keeps rising, Guardian survey finds

• What are the arguments that FTSE companies would use to justify the salaries of their chief executives?
• Is it justifiable to award significant salary increases to the CEO of an organisation that has seen its share price slide over the last 12 months?
• Look at the example of Bart Becht. Is any individual (whether an international footballer, film star or businessman) worth £37m per year?
• Compass have called on the government to establish a High Pay Commission to curb excessive pay. Look at their campaign statement and consider how they would respond to the Guardian survey results.
• Update for Teachers : Since this article was first posted, the Guardian has added a "datablog" of background information on the salaries of the top FTSE 100 Chief Executives. There's a wealth of data to explore and analyse, including comparisons of the salaries of CEOs with that of the average employee within the company. Enjoy the gasps of amazement!

Dutch knock out Scotland, and take the lead on executive pay

Sorry! It's yet another HR Case Studies item on executive pay! This week not only have the Dutch shattered Scotland's dreams of World Cup glory, but they are also on the verge of becoming first nation to put a cap on the value of bonuses paid to their most senior banking executives.

Their new code, drawn up by the Dutch bankers’ association and the finance ministry, will restrict such pay-outs to one year’s salary. The code does not extend to traders and investment bankers who are not executive board members, but it does call for a "meticulous, restrained and long-term remuneration policy" (along the lines of the guidelines issued this week by the CIPD). The Dutch finance minister has stated that such a code would not even have been debated a year ago. The approach of the Dutch will inevitably put increasing pressure on other countries attending the G20 summit in Pittsburgh later this month.

Surprisingly, rather than rejecting the introduction of the code, the chief executives of ING Bank and ABN Amro have given their broad support, even if they will have to face the future challenge of how to attract foreign executives.

Dutch banks agree bonus code

• Will other nations follow the lead set by the Dutch?
• How effective will this code be if only the Dutch follow it?
• If banks in the Netherlands are unable to compete on the basis of high bonuses, what other methods may they be considering to attract talent from elsewhere in Europe where such a code is not yet in place?
• The code affects board members, but not traders and other senior managers who are not on the board. Is this likely to tempt successful managers to remain below board level?
• Further research activity: What are the major Dutch financial institutions that are likely to be affected by this decision?

CIPD issues guidelines on executive reward

Followers of HR Case Studies will be aware of the debate that has been buzzing around concerning the calls for regulation of the salaries of the highest paid UK executives, particularly within the banking and finance sectors. The CIPD (the organisation that represents the interests of the UK's HR professionals) has this week issued guidelines to its members to assist them in developing sensible and fair remuneration policies and practices. The CIPD has commented that, “Unfortunately, the issue has degenerated into a slanging match around how much executives earn, rather than about what organisations need to consider to ensure that the way they reward their executives supports the needs of the business.” Echoing the views of EU finance ministers, the CIPD recommends that variable pay, such as bonuses, should be linked to financial and non-financial objectives and deferrals of cash payments should be considered if necessary. In particular, the principles address the issue of linking reward to business performance, and advises that variable elements of the executive's pay (e.g. the annual bonus) should ensure that the value of the package, in its entirety, will vary with business performance. In simple terms, if the business performs, the exexutive is rewarded with a bonus, but if it doesn't the bonus is reduced or withheld.

CIPD issues reward code to tackle executive pay

Read the CIPD Principles of Executive Remuneration guidelines and answer the following questions:

• What does the CIPD mean by a Remuneration Committee?
• Why does the CIPD recommend that at least one member of the Remuneration Commitee is independent from the company?
• What is meant by fixed and variable elements to a remuneration package?
• What is meant by an incentive scheme?
• Principle 4 states, "Incentives should reward outcomes that lead to, and reflect, sustainable and measurable value creation." What does that mean in simple English?
• The principles talk of deferring cash bonuses. What does that mean and why might an organisation consider it?
• The CIPD is seeking feedback on its proposals. What would your comments be?

Further reading from Management Today: Ten Top Tips: Designing bonus schemes

Yet another organisation withholds bonus payments

Although the scenario may be very contemporary, the Dilbert cartoon strip is actually from August 1998, which may give slight comfort to those employees whose organisations will be refraining from paying out bonuses for 2009 performance! As ever, behind the humour of the Dilbert cartoon, there are serious issues raised:

• The strip hints that bonuses are paid out every year, and employees have assumed that they are a certainty. If this is the case, does the bonus lose its motivational impact?
• Many organisations pay employee bonuses based partly on company performance, and partly on the employee's perormance. What happens where the employee has worked hard to succeed, but the company hasn't hit its financial targets?
• When times are financially tight, what else can a company do to motivate its employees to perform?
• Any suggestions on how Dilbert's boss could improve his motivational and communication skills?

Time for government intervention on excessive pay?

Click

Although few would now argue that there should be a legal requirement for a minimum wage, calls for a High Pay Commission to curb excessive pay will inevitably create a stir in the boardrooms of the UK. A number of major public figures have added their names to the campaign of Compass (a UK centre-left “Think Tank”) to do just that, and the campaign is already receiving a high level of media coverage and comment. Compass argue that the current economic crisis was largely fuelled by the high salary and bonus culture particularly within the finance and banking sector, and that now is the ideal time for the government to be taking action. The argument is illustrated by an example of an employee on the national minimum wage who would have to work 226 years to earn the same amount as a Chief Executive of a FTSE 100 company earns in just one year. Compass also argue that top managers are often rewarded for short-term success, but never penalised for long-term failure. Especially as many of the failed banks are now in public ownership, it’s argued that the government has a moral obligation to set reasonable pay structures within such institutions.

• What’s the current national minimum wage in the UK?
• It’s often argued that large institutions (particularly financial organisations) have to pay their senior managers seriously high salaries, otherwise they would be recruited by rivals, or possibly tempted to move overseas where salaries may be higher. As the UK is as deep in the financial crisis as the majority of other industrial nations, is this argument valid?
• Many organisations have introduced links between the company’s performance and the financial reward of all employees. Typically, a professional employee (earning around £25,000 per annum) may receive a bonus of 5% if the company hits all its performance targets. The Managing Director (probably earning upwards of £100,000 per annum) may receive a bonus of over 40%. Is the motivation to perform the same for both employees?
• What other mechanisms may a company wish to introduce to share the financial success of the business between all employees?
• What do you believe will be the reaction of the UK public to the call from Compass for a High Pay Commission?