Pay honesty the best policy if it gets results

There is a freight train approaching us on the issue of transparency and
executive pay. The moves put forward by the Government to open up senior
executive packages to shareholder scrutiny look likely to transform a number of
sacred issues. It would be easier if we were just talking about shareholder
scrutiny. The problem is that with high-profile businesses and people, the
issues leap into the public domain and a lot of rational debate is thrown out
of the window.

Fundamentally, transparency must be a good thing. It forms the core of most
culture change programmes and yet, when it comes to the subject of reward,
people get very nervous. Press and public alike are regularly horrified by the
size of base salaries and bonuses paid to senior people, and on the surface
they have a point.

When the chief executive gets, say, a 15 per cent increase to his base pay,
equating to upwards of £50,000 per annum, the criticism flows. What can he have
done in such a short period to have earned it and how can it be justified when
most of the workforce will get nowhere near this as a percentage increase?

This view, while compelling at a social and emotional level, is largely the
result of commentators, shareholders and the public not having faced up to a
harsh reality – that the normal laws of supply and demand are at play.

The worldwide executive search market has been estimated as a US$10bn market
– the reason is that great senior people are in huge demand and in short
supply. They are paid so well because they are scarce and chairmen of boards
know that long-term sustainable profit is derived from having superior people
on board.

The whole thing collapses when high reward is not tied to high return. If
there is no transparency, shareholders and others have a right to be concerned.

I would rather see a board of directors paid bonuses based on the key lead
indicators for the business. These might include employee attitude and
engagement, consumer perceptions of the company’s brand, amounts spent on
research and development. It is this that leads to profits. I would much rather
invest in a company that is getting these variables right than put my money
into a business that is good at manipulating its share price because its senior
officers are worried about their options.

Transparency is a good thing – but only if it leads to boards which measure
the right things. The Government has to avoid anything that leads to businesses
grinding to a halt. Businesses have to accept that transparency is at the heart
of change programmes, and the public needs to accept that big people get paid
big sums to do what they do on behalf of shareholders.

Sir Alex Ferguson is paid well – but he has delivered. Why can’t a captain
of industry be seen the same way?

By Chris Matchan, vice-president of consumer practice, Korn/Ferry

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