Does a higher pay package lead to better performance by company leaders? If you believe research in this area, the answer would be no.
Some of the trickiest issues for HR professionals are ethical ones. Genetic testing and leadership dishonesty are just some of the issues tackled by Professor of Ethics at Adelaide University Petrina Coventry (FPCHR). The academic will shine a spotlight on ethical dilemmas for HR at AHRI’s National Convention in August 2016. Here she turns her attention to the thorny issue of inflated executive remuneration.
After the smoke cleared from New Year’s fireworks I, like many, turned bleary-eyed to the world news in expectation of seeing what the celebrations had brought.
Rather than be amazed by celebrations, I was amused by headlines of record-breaking remuneration payouts for CEOs in 2015. Fireworks went off for me again.
CEO and executive remuneration is an ethical issue.
It’s of increasing relevance and concern for shareholders, of increasing importance for HR leaders, and it has fallen victim to increased complexity, controversy and risk.
Complexity in executive remuneration has been driven by a number of factors: a desire following the global financial crisis (GFC) to regulate remuneration in an attempt to strengthen pay for performance links; increased interest and activity from accounting firms and consultants to ‘assist’; growing shareholder activism; and regulation driving the ‘say on pay’ and AGM activity promoting Yes/No votes around executive remuneration reports which affect board representation.
For all this activity, angst, interest, and fees spent on consultants, the issue of CEO and executive remuneration has continued to grow in size and complexity. The gap between the top and the bottom of organisations has become increasingly disproportionate and striking; CEO packages appear to be out of line with results, and pay ratios are widening. If we look at the AGM reviews this appears unbounded by sector or location.
Despite the escalation in consulting and remuneration committee commitments, and increased push for transparency around reporting combined with the introduction of ‘say on pay’ for shareholders, there is an increasing problem.
Start with the question, “Does pay affect performance?”. If you believe research in this area, the answer would be no. Roles that are complex and manage ambiguity, that is management and executive roles, do not lend themselves to pay for performance. Recurring research (Harvard meta-analysis) indicates that only 4 per cent of a CEO’s salary influences a company’s performance. The recommendation seems to be that you should understand what the real value of the role is, pay that, and focus on delivering results. Reducing unnecessary complexity will help all those who vote to have a greater chance of supporting remuneration proposals.
Keep consultants accountable for fixing the problem rather than adding to the problem. Consulting advice and recommendations for remuneration committees typically centre on mathematical equations focussed on the packaging and valuation of short and long term incentives as well as fixed pay calculations. These calculations are often based on benchmarking which proliferates the problem by reinforcing out-of-date practice, false comparisons and no perspective on what the individual may actually be able to influence. Continued repetition of practices that don’t work, and benchmarking through peer pay comparisons helps account for the rising tide of corner-office salaries.
Ensure that any conflict of interest is killed. The relationship between compensation committee members and the CEO, including the HR team, are not always impartial, and this can influence decision making. Compensation consultants that are often brought in to help figure out remuneration levels are at risk of conflict as they hope to secure other, more lucrative business from the company or from board members.
Have the courage to innovate. For some there is a fear that other companies might not follow suit, which might erode their competitiveness; this seems like false logic. With the right logic and explanation, proxy advisors would vote yes for packages that are more aligned with reality.
The responsibility of HR practitioners is critical. It is the final frontier for HR leaders. When dealing with executive remuneration there is no barrier between you and the board, shareholders and media. It is a moral imperative that HR leaders know the science, mathematics, formulas, history and logic behind executive remuneration. That does not just mean packaging, but also understanding how to make recommendations, negotiations and responsible reporting. The onus on responsible remuneration systems and how they operate rests with the HR function; it cannot be outsourced completely.
It will be ethical organisations that are courageous enough to change the system, be brave and smart enough to say no to old practices that are not working. The real ‘Yes/No’ vote should be centred on whether to eradicate outdated paradigms and to innovate, driving real pay for result ratios, equity and fairness for all stakeholders. I vote YES to that.
Professor Petrina Coventry will be speaking at AHRI’s National Convention from 3 to 5 August in Brisbane. To check event details and register, click here.