Executive pay through the lens of purpose

By 22/09/2016Blog

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Written by Charles Wookey

The banker J P Morgan, it is said, would never lend money to a business where the boss was paid more than 20 times the wages of the lowliest employee. Anything more, Morgan thought, showed that the boss was only in it for himself and the business was therefore a credit risk.

Now, a century after Morgan, executive pay is on a different scale  altogether. Last week the High Pay Centre reported that in 2015 the average FTSE 100 CEO was paid £5.5m – nearly 150 times the average employee wage.

This may seem normal for some leading executives as they benchmark against each other  – but there is increasing unease among  investors, employees, customers and society at large.  Resentment is spreading, and shareholder revolt is in the air.

There is much commentary on the sheer scale of the rewards and the antipathy it arouses, but less on what the reward can signal about the company and the assumptions that the Board, and investors, are making in approving a particular pay package.

Recently Blueprint invited a group of executives, board remuneration committee members, investors and other experts to discuss the issues around CEO high pay. No one sought to defend the status quo.  Everyone agreed that the system is broken and there is no single way to fix it. Executive pay is a complex systemic problem, said Stefan Stern, director of the High Pay Centre – and “just like Agatha Christie’s Murder on the Orient Express, everyone’s fingerprints are there.”

Are  there some systemic assumptions being made about business purpose and what motivates people which help explain these pay awards?. Mostly strikingly, everyone agreed that the executive pay issue cannot be isolated from the wider question of what should be the purpose of business in our society today and in the future. If the sole purpose of a business is to maximise shareholder value, if people really act only out of self-interest at work, and if only the short-term financial results matter, then yes, stratospheric pay for chief executives has a certain logic.  The  rationale is that the CEO is the creator of value in the company , the employees act at the CEO’s direction and both the CEO and the employees are motivated by negotiated financial incentives.

In essence we have a  “command and control” transactional culture. Such companies respect power and hierarchy, with a  “drive me, tell me, feed me” ethos. As long as growth continues, everyone , including investors , is fed with their share of the profits, and that justifies the CEO’s pay.  And Boards and investors are loath to risk losing the CEO to another company outbidding them for their services. However, left unchallenged such a company culture contains the seeds of its decline – lack of challenge , risks taken to preserve short-term results, acquisitions made merely to boost growth, people rewarded for failure, innovation sidelined, staff laid off….

So what can we do? One step is to recognise and promote an alternative view of business purpose. Consider the belief that the purpose of business is to contribute to society and, by so doing, to produce sustainable profits. Consider, too, a more realistic view of the human person – yes, self-interest prevails if there is fear or disrespect, but the human person has a strong desire to seek meaning, to nurture relationships and to create something worthwhile with others. These two assumptions lead us towards what we might call the “inspire and empower” company and CEO .

The culture of such companies rests on the belief that people are also motivated by other things than money – as John Cryan, the co-chief executive of Deutsche Bank, put it, he would “not work any harder or any less hard in any year, in any day because someone is going to pay me more or less.” Companies operating with this more realistic view of the human person forge an “involve me, listen to me, challenge me” relational culture in which equality of opportunity, a sense of meaningful activity and durable relationships can flourish.

Excessive CEO pay becomes an obstacle to this as it denigrates the contribution and risk of others. The CEO must be a role model in a business’s use of its purpose to build sustainable success.  As the chairman of Handelsbanken observed during a recent change of CEO, “It is possible to be an excellent leader and manager but not fulfil the requirements of CEO of Handelsbanken.”

Big investors are also starting to talk about long-term stewardship and broader social goals – look, for example, at the recent annual letters from Larry Fink of Blackrock. Are they also asking themselves which type of company culture is most likely to deliver on those interests and what pay quantum and ratios signal about the the likely culture that will exist ? Of course this also requires asset owners and managers to ask themselves the same questions about their own business as they will bring their business mindset to their investment decisions.

At its heart business is a social activity  and broadly held assumptions shape, and change, human expectations and behaviour. If – and only if –  the assumptions change the system can change.

By emphasising business’s value to society, and these other sources of human motivation, perhaps we can start to align the executive pay system to foster  a more  collaborative style of leadership in pursuit of shared purpose.  Recognition in monetary – and non-monetary – terms would then depend on the CEO’s role in delivering long term value through enabling and role modelling the collective organisational pursuit of these broader goals.  Furthermore if companies commit to live out a purpose to serve the societies in which they seek to prosper, and to engage and welcome public scrutiny of their progress, they are then engaging on a different basis with their stakeholders. And in that context, the question for business and investors is whether disproportionate executive pay is a blockage rather than an enabler to aligning long term interests.

And moving to non-financial incentives does not mean any less effort to succeed .The recent Olympic games are heartening evidence of our ability to dedicate  years of effort, pain and hardship to the quest for a ribbon and a worthless – but glorious – metal disk. Excessive executive pay is a mark of a society where money has swamped all other ways of measuring human worth and motivation. Alongside a richer vision of the purpose of business itself we need also to retrieve those non-monetary forms of respect, appreciation and recognition. Being thanked, being  honoured and celebrated for excellence – these have an extraordinary power to inspire. Maybe they are also an important clue to recovering a more human centred view of business life which both serves society better and enable people to feel truly fulfilled through work.