But first the facts.
In 1980 in the USA, the average CEO earned 42 times the average workers pay. By 2000 that multiple had increased to 531.
Encouraging future behaviour The most obvious challenge is that we have known for some time that paying bonuses and high salary after the event does not of itself encourage more productive behaviour. That’s in part because of the timing – the performance has already occurred. There is also the thorny issue of unintended consequences. Simply put, you may not get what you thought you paid for. So you bonus, for example, on how rapidly customers are acquired, only to find that many are the wrong customers acquired in the wrong way.
Rewarding past behaviour So what’s the basis for paying very high salaries and bonuses? In most cases it’s not to encourage future behaviour – but rather to reward past behaviour and to ensure the person stays with the firm. In corporate speak, to ‘retain top talent’. I heard this phrase from Stephen Hester, the CEO of the Royal Bank of Scotland. Talking on the Today Radio programme he said the recent bonuses paid to the bankers was crucial to retaining talent. He went on to say that if the 1000 talented people the bank had lost (presumably because of lower bonuses) had been retained, he believed the bank would have made an additional billion pound profit. Scary stuff – so let’s look at this argument a little more closely.
Creating significant value The basis on which Stephen wanted to retain these bankers by paying significant bonuses was because in his view they created significant competitive value. Now we are on firmer ground. Strategists have for some time understood the means by which competitive value is created. Here it is:
- Competitive value is created when the actions themselves are seen to be able to create real and sustainable value. – that is there is a strong and observable link between actions and outcomes.
- Competitive value is created when the skills and competencies are rare – that is few others hold it.
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Now let’s take a look at executive and bankers bonuses against these two conditions.
A strong and observable link Is it individual bankers and top executives who themselves create value? Is there a strong and verifiable link between their actions and the outcomes? That’s a question my colleague Boris Groysberg from Harvard Business School studied. If performance is about the individual, then we could expect that when they leave a company and join another company their performance will remain the same. Boris found performance declined – and often significantly. In fact he discovered that it was the ‘brand’ executives and bankers operate under, the networks they have and the teams who support them, which all play a part in their performance. His book on the subject, called Chasing Stars: The Myth of Talent and the Portability of Performance will be out soon.
Rare Skills OK – so what about these rare skills? Are the banker’s skills and senior executive skills so absolutely rare that few others could accomplish them- and that there is not a large talent pool of people who with the right training would jump at the job? This is a question David Bolchover asks in his recent book Pay Check: are top earners really worth it?
As he points out, the justification of top earners pay is through the analogy with other highly paid people such as footballers. After all, there is no public outcry when the footballer Wayne Rooney pockets a million pounds a match. In his case, and that of other star performers, their rarity is clear. Kids all over the world aspire to play for Manchester United. Talent scouts comb the world for those that show early promise. Training is ultra competitive and every match Rooney has to demonstrate in front of millions of viewers that he is indeed worth his weight in gold. There is no doubt that his skills are rare.
So what about bankers and senior executives? Do they have one in a million skills – or could it be that many intelligent people with the right drive and determination could do their job? That’s not to say they are not skilled – but perhaps no more skilled than a brain surgeon or a nuclear physicist who get paid a great deal less.
Why the debate on pay is important
I think these are important issues to debate because:
The negative impact of the gap First, I’m very struck by the argument Richard Wilkinson and Kate Pickett made in their recent book Spirit Level: why more equal societies almost always do better. They examined the data from regions around the world and found that it was not income level per se that was associated with societal problems– but rather the extent of the gap between those with most and those with least. Their argument has profound implications for how we think about pay in the future.
The unintended consequences. I’ll simply quote David Bolchover here ‘ when individual value is so difficult to measure, other criteria – alliance formation, patronage, self-promotion, superficial perception and sycophancy – can often act as the agents of career success’ –Sound familiar? For a particularly cruel juxtaposition – take a look at the quote from the Prime Minister of Bhutan in my last blog.
The contested nature of executive pay The third reason why I think this is a debate worth having, is what we have discovered in our Future of Work Consortium that whilst we are all happy to talk about Gen Y, or flexible working, or open innovation – we are not happy to talk about executive pay. It is what I would call ‘contested’. By that I mean that it resides so near issues that sit at the heart of the corporation – issues of power, fairness and equity- that they are more likely to be swept under the carpet than brought into the open and debated with courageous conversations.
So, as we think about the next decade in our society and corporations let me ask you to ponder these questions?
How can we ensure that we have an open debate about who gets paid what?
What would it take to build corporations where the gap between those with the most and those with the least does not overwhelm the sense of decency and fairness?