The
National Association of Pension Funds (NAPF) among others, has re-opened the debate about the basis on
which directors pay should be set.
Recent
government initiatives to make the reporting of directors’ reward strategies
more transparent and subject to a vote of shareholders are very welcome.
Indeed, the effective embracing of these new mechanisms by shareholders has
forced many secretive remuneration committees to re-think their reward strategies
and links to performance.
The
most recent NAPF proposals appear to go much further. They suggest defining
directors’ pay by means of a multiple between the lowest paid and the highest
paid in an organisation. The multiple mooted was in the region of 20-times the
lowest paid salary.
This
strategy implies a strong connection between the achievements of those at the
top, and the value realised through every single employees’ contribution. It
rightly provokes controversial questions, such as whether an absolute limit
should apply to directors’ remuneration, whereby they are well rewarded and incentivised without being paid
excessive amounts.
Could
it be that over-generous rewards for directors act as a disincentive to the
workforce, who feel that their
personal contribution to the success of the organisation is not proportionately
recognised? And, of course, there is the perennial question of the point at
which money ceases to be the key motivator. For most people, there are many
other motivational drivers to performance.
It
seems that in some cases, excessive rewards for directors can act as a
disincentive to the majority of the key business stakeholders, shareholders and
perhaps customers. Often the links to truly outstanding rewards for outstanding
performance are vague, with shareholders failing to see excellent share
performance while bumper director payments are made.
Maybe
the NAPF proposals are helpful in setting a guideline against which directors’
remuneration should be assessed. If a factor of say 20- or 25-times the
lowest-paid employee’s salary was set, then it would be up to each company’s
remuneration committee to demonstrate why they wished to operate outside those
parameters.
This
would help to focus remuneration committees on much more direct and
demonstrable links between the stakeholders’ interests, business performance,
and rewards.
In
any case, transparency would definitely be improved, and that can only be a
good thing for all of the parties concerned.
By Paul Pagliari, HR director, Scottish Water
