CIPD: Fundamental rethink needed on chief exec pay
The upward momentum of chief executive pay and reward in the UK’s largest organisations has reached a crisis point, according to new research from the CIPD. The research also highlights that pay does not clearly correlate to personal performance or business outcomes and this is having a significant impact on the motivation levels of the wider workforce.
The research, which includes a survey of employee attitudes on CEO pay, an in-depth literature review and focus groups and interviews with members of the finance, HR and investor communities, explores the behavioural factors that are causing executive pay to spiral and the impact that this is having on the workforce.
The employee survey, The view from below: What employees really think about their CEO’s pay packet, highlights that:
- Seven in ten (71%) employees believe CEO pay in the UK is ‘too’ or ‘far too’ high
- Almost six in ten (59%) employees say the high level of CEO pay in the UK demotivates them at work
- More than half (55%) of employees claim the high level of CEO pay in the UK is bad for firms’ reputations
- 45% believe their own CEO’s pay is too high, with a further 30% saying they don’t know and just 4% say their CEO’s pay is too low
Only a third (32%) of employees agree their CEO is rewarded in line with their organisation’s performance, with two-thirds saying they disagree (38%) or don’t know (29%).
Charles Cotton, CIPD reward adviser, commented, “The growing disparity between pay at the high and lower ends of the pay scale for today’s workforce is leading to a real sense of unfairness which is impacting on employees’ motivation at work. The message from employees to CEOs is clear: ‘the more you take, the less we’ll give’. At a time when the average employee has seen their salary increase by just a few percentage points over the last several years, we need to take a serious look at the issue of top executive reward.
“It’s crucial that chief executive reward packages are simpler and more clearly aligned to both financial and non-financial performance measures. These should include how their leadership impacts on critical outcomes such as employee wellbeing and engagement, accountability for culture and behaviour, and workforce development, all of which are vital underpinnings of the long-term health of both people and business.”
A second CIPD report, The power and pitfalls of executive reward: A behavioural perspective, goes on to explore some of the factors that have contributed to FTSE 100 CEO pay increasing to 183 times that of the average employee, compared to 47 times in 1998 (source: High Pay Centre, 2015). These challenges and how they can be addressed include:
- A lack of transparency over CEO pay and how it relates to the wider workforce: The CIPD recommends that the Government requires all publicly-listed companies to publish the pay ratio between the CEO and the pay of average full-time employees. This will help encourage accountability and prompt a greater focus on this issue among key stakeholder groups such as investors who can help to drive change and hold businesses and senior individuals to account.
- Overly complex performance measures: The report suggests that significant changes need to be made to how bonuses and long-term incentives are structured and why they are paid out. Both of these forms of variable reward tend to be overly complex, and disproportionately focused on financial goals rather than being linked to other outcomes and stakeholders’ interests, including those of the employees. In addition, existing long-term incentives may not motivate because they are predominantly linked to financial measures, which are often affected by factors outside the control of CEOs, such as the economic cycle.
- One size doesn’t fit all: The report also notes the upward influence of benchmarking comparisons across CEO peers. It recommends that remuneration committees need to set rewards that are appropriate for the organisation and the individual in question, rather than being driven by what a particular candidate desires or being swayed by what’s perceived as ‘the going rate’ in the market. Currently, many remuneration committees lack the knowledge, skills and influence to make this change.
- Powerful personalities: The CIPD recommends that organisations increase their focus on ensuring CEOs bring a balanced leadership style, appropriate to the culture and context of the organisation. The report also highlights that top leaders will tend towards more overly confident and assertive behaviour profiles, which also makes them adept at negotiating a higher pay and reward package. It’s also noted, however, that the real driver in these cases is more about status and recognition than it is about the need for absolute amounts of money. Reward packages should therefore encourage individuals to strive for industry recognition or impact on wider societal goals, for example, rather than simply having the biggest pay packet amongst their industry peers.
Too much focus on the top: The research suggests there should be less focus on disproportionately rewarding the performance of key individuals given that, where CEOs promote shared or distributed leadership, there is likely to be better overall team performance.
Cotton added, “It’s time to fundamentally rethink CEO pay. Too often, high reward levels are explained by the power and personality of the CEO, the make-up of the remuneration committee and the need to compare favourably to existing market rates, rather than clear measures of individual and sustainable and balanced organisational performance. There’s also very rarely any ramifications for poor performance. As a result, reward has just continued on an upward trajectory and as many businesses seek to restore trust from their employees, customers, and communities, it’s time to address the issues and challenge the direction of travel.
“Behaviour follows the measure; we need CEOs to work to a new scorecard that encourages positive, motivating behaviours and success beyond financial performance. Without the right checks and balances, businesses will struggle to break the cycle and this will continue to have an impact on workforce morale and employee engagement.”
Stefan Stern, director of the High Pay Centre, welcomed the new research. He commented, "CEOs are employees too. But excessive pay packages mark them out almost as a different species. If we are really 'all in this together', the gap between the top and the rest of the workforce should not be so high. Outlandish pay sustains the myth that a single, heroic individual is somehow running a big business on his or her own. That's simply untrue. Leadership matters, and good leaders should be well rewarded. But the workforce does the work."
Finally, when asked for their perspective on what can be done to address the issue of excessive chief executive pay, the CIPD’s survey found that seven in 10 employees (72%) wish to see greater pay transparency generally, and more than half (53%) want it to be published for all levels.
When asked which measures would best improve the link between the pay of CEOs to that of employees and their organisation’s success, the top ranking suggestions rated by employees were: ‘publish the ratio between CEO pay and the pay of the typical employee’ (51%), ‘limit the size of CEO bonuses and incentives’ (51%) and ‘require CEOs to pay back bonuses and incentives if the company’s performance declines’ (62%).