Executive Pay - Problem or Symptom?

Once again executive pay is in the headlines. According to politicians, the popular press, radio phone-in hosts and the general public, the problem has been created by the greed of the bosses who find themselves in positions of such power that they are able to award themselves pay increases and bonuses that most of us can only dream of.

Unfortunately the debate seems to always end before a sensible solution has been found.  For example, Vince Cable, the Business Secretary, repeatedly states that businesses need to regulate themselves or else the Government will step in with legislation.  But what form that legislation might take he never says, and the more you think about it the more complex the problem becomes.  For example, if the Government set a limit on an executive pay, would it be the same regardless of the size of the company?  Would it include share options?  Would it apply to all companies or just public listed companies?  Would foreign multinational companies or executives who were foreign nationals be included?  The questions are endless; which is probably why business leaders do not appear to be taking the threat of legislation seriously at the moment

My own view is that legislation would be a serious mistake for two reasons.  The first is that the likelihood is that its only impact will be to drive more executives to move abroad.  Most of our largest companies are multi-nationals and in most of these cases the executive team could operate equally effectively in any one of several countries around the world.  This is not an empty threat as we have previously seen companies relocate abroad following changes in corporation tax.  The net result would therefore be negative as UK taxation income would fall and Britain’s reputation as a business-friendly country would suffer a serious blow.

The second reason is that executive pay is not, of itself, a problem - it is merely the symptom of a problem.  Unfortunately, by focusing on the question of executive pay, we are diverting attention from the real issue.

The issue that lies at the heart of the problem is not the pay per se, but the power that executives have to persuade their companies to award such large pay packages.  Is it really the case that the supply of top talent is so limited that we have to pay the CEO of a FTSE 100 company the equivalent of a Premiership Footballers wages simply to accept the job?

For years businesses have been talking about delegation and empowerment, about pushing responsibility ‘down’ within the organisational hierarchy and about creating greater corporate agility based on moving decision-making closer to the point at which the organisation meets its customers.  In reality, the same information systems that have been used to facilitate this empowerment at the lower levels of the corporate hierarchy have been used to consolidate more power in the hands of the senior executives at the top.  How else was it possible for Fred Goodwin at the Royal Bank of Scotland to make such complex and yet crass decisions that led the bank to the point of insolvency?  Or for Bernie Ebbers, the CEO of WorldCom, to perpetrate a multi-billion dollar fraud while supposedly being scrutinised by auditors, accountants and non-executive directors?

As more and more power has been concentrated in the hands of fewer and fewer people, the list of candidates considered capable of fulfilling the role of CEO has grown ever shorter.  The simple forces of demand and supply are therefore the reasons why executive pay has risen four-fold during the last 12 years.

The solution is not to criticise the people few who are receiving these astronomic pay packages, but to address the forces that created the anomaly in the first place.  And it is precisely here where Vince Cable could do some real good.  Instead of spouting popularist rhetoric, he could model the way by persuading the largely state-owned banks to devolve more authority from the senior management team, appoint more ‘rising stars’ to senior positions and support them with experienced non-executive directors who take a hands-on approach to supporting the executive board.

Making the leadership of companies more of a team-based activity will, in my experience and opinion, improve the quality of decision-making, improve transparency, reduce risk and create more opportunities for progression and career advancement within the company.  It will also limit the excesses of corporate pay as, by sharing power and authority more widely, it is far more likely that suitable candidates will exist internally to fill vacancies as and when they arise rather than forcing the company to offer excessive packages in order to attract external candidates away from their existing employer.  

The researcher and management theorist Meredith Belbin once said; “No one is perfect, but a team can be.”  Reducing the reliance on the decisions of a ‘celebrity CEO’ not only reduces the risk of the company suffering as the result of an erroneous decision, it also increases the likelihood of the company making good decisions.

Let’s hope that the side-show debate on executive pay dies down soon and that Vince Cable turns his attention to the more serious task of improving the global competitiveness of British business.

About the Author
Alistair Schofield is Managing Director of Extensor Limited.