Executive pay cuts will deter top talent

Give the fat cats their creamThe chances are that, like me, you may have recently opened your credit card bill for December and will be ruing your generosity. And just in case you have forgotten how much of a philanthropist you are, the Bank of England has put up interest rates.

At the same time, many of the country’s elite City workers will be opening their bonuses and whooping with delight. London’s bankers alone may have earned a record-breaking £8.8bn in bonuses for 2006, according to the Centre for Economics and Business Research.

A lot of these folk aren’t doing so badly already. The current average basic salary for a UK chief executive working in a FTSE 100 company is £703,000, according to business consultancy KPMG’s Survey of Directors’ Compensation 2006.

Finance directors in FTSE 100 companies typically earn £406,000, while other executive directors can expect to receive an average basic salary of £380,000.

High-pay party poopers

Cue various enraged parties lining up to contribute their tuppence-worth of bile on the UK’s ‘fat cats’. The Work Foundation has even mooted a High Pay Commission to put a brake on high salaries on the basis that “growing pay inequality corrodes the basic concept of fair reward that underpins a thriving society”.

This is plain madness, but because it’s about pay and this is the UK, there will be plenty of people supporting such a notion (usually very loudly), while those who dare to think about earning top dollar will keep the noise down for fear of the illiberal wrath of their liberal-minded colleagues. That leaves it for some loudmouth like me to say it, so here goes – and keep the righteous indignation until the end, if you please.

Anyone who has a grasp of basic economics realises it is imperative we give the fat cats their cream.

Let’s consider the UK’s current standing when it comes to skilled professionals. Among the Organisation for Economic Co-operation and Development nations, we rank 20th for post-16 participation in education, and 18th for level two qualifications in the workplace.

In a recent survey of UK companies, more than four-fifths (81%) said they lacked the internal talent to fill future leadership vacancies. Meanwhile, as India and China churn out graduates faster than a McDonald’s burger line, UK productivity is behind that of the average of all other G7 countries, while US productivity is 27% higher than the slothful UK.

We need as many top people in this country as possible to save us from economic oblivion. We need them to come from wherever we can find them, and we need them now.

Increasingly, leading companies are searching on a global basis for their top bods. The wunderkinds we are trying to attract from the UK and beyond already face scary amounts of corporate governance. Just for a laugh, try offering them too many share options and sit back and wait for the consequences.

Having considered this, executives then may have to uproot their whole families to relocate. When they get to wherever they are going, they know it could be a very temporary arrangement. For example, the Booz Allen Hamilton Chief Executive Succession Survey 2005 showed that 15.3% of chief executives at the world’s largest 2,500 public companies left office in 2005 – a 4.1% increase on 2004 and 70% higher than in 1995.

Why don’t we just cut their salaries and add another disincentive to make sure they go elsewhere? That’s a great idea, isn’t it? No sorry, it’s not. Executives’ salaries are driven by market forces. If we bow to the pressure of those who want their fat cats put on a financial Atkins diet, then all we are doing is telling the top talent to go elsewhere.

Performance management is key

Our top earners tend to work dastardly long hours under considerable pressure. For their pains, they also get heavily taxed and so lose a large proportion of that money anyway.

The key to this whole shooting match lies not in pay, but in performance management. Returning to the Booz Allen survey, we find the number of CEOs dismissed for underperformance has quadrupled in the past 10 years, so at least we know reward for failure – where the real problem with executive pay lies – is less acceptable. But it still goes on. Earlier this month in the US, Home Depot CEO Robert Nardelli got a £114m severance package after six years in the job, and he left with his company’s share price actually down from when he joined. This is not right at all.

How you go about performance management is your own business, but this is the kind of thing HR is supposed to be good at, and so you have a great opportunity to be a leading voice in a very important debate.

At the end of the day, it comes back to the fact that if you pay peanuts, you get monkeys. Are some pay levels utterly obscene and likely to make you wonder how their recipients sleep at night? Yes. Are they a necessary evil? Without a doubt.

By Michael Millar, business writer

Do you agree with Michael? Or is he wide of the mark? E-mail your response to personneltoday@rbi.co.uk

Comments are closed.