Executive remuneration

By Simon Longstaff

This article was published in Living Ethics: issue 76 winter 2009

Despite the intensity of recent debate about executive pay, two fundamental questions have been largely ignored, writes Simon Longstaff.

The first concerns the relative value we place on business leaders’ contribution to society. The second relates to embedded assumptions about human nature – and how those assumptions shape corporate remuneration policies.

In the midst of furious condemnation of executive pay, there has been barely a murmur of dissent about the fortunes earned by elite performers in sport and the arts (especially music and film). When it comes to the likes of: Tiger Woods, Julia Roberts, David Beckham, Venus Williams and the Rolling Stones, then the critics’ knives are sheathed. Do we consider the contributions of such people to be more valuable than, say, those of a highly skilled and effective Director of Nursing, working in a public hospital, or the Principal of a major high school?

Indeed, do we really think that those who excel at hitting or kicking a ball or entertaining us in other ways should be better remunerated than, say, someone who is ultimately responsible for the global operations of a company like BHP Billiton? In posing this question, I do not mean to suggest that we should be indifferent to the excesses of some within the world of business (especially those alchemists who transmute the lead of corporate failure into gold for their taking). However, there is a more serious issue that we ought to be considering – an issue that requires us to move beyond the question of how much people are paid and instead, confront the underlying beliefs that make possible those cases that merit our outrage.

While a concern about the size of the packages being awarded to executives is understandable, a far more significant issue is being ignored. If you listen to business executives, company directors, remuneration consultants, fund managers, shareholders, government ministers … you will find that they tend to agree about one thing – that remuneration packages must be structured in a way that will bring about alignment between the conduct of executives and the long-term interests of shareholders.

At the heart of this agreement is an oft unstated assumption that human nature (or at least that of business executives) is invariably and narrowly self-interested. There is tacit (and sometimes explicit) rejection of the possibility that people might strive to do their best because they have a commitment to the excellence of their craft or because they have promised to do so. There is no room left for the practical expression of values such as loyalty and commitment. All of this is evident in the weight placed upon the force of self-interest when structuring executive remuneration. The core assumption is that you only get what you pay for.

Let me illustrate my point by constructing a dialogue between the Chairman of a listed company and a prospective new CEO. The exchange is a work of fiction, the underlying principles that inform the discussion are not.

Chair: Well, Bob – as you know, one of the issues that the Board is keen to focus on is the creation of long-term value.

Bob: Of course … excellent approach.

Chair: So, why are you frowning?

Bob: It’s difficult. My head agrees with the Board’s thinking – heaven knows that’s the way to go. It’s just that I doubt that my heart will be in it … unless …

Chair: Unless?

Bob: Well, you could make it worth my while. I mean, if you were to offer me a fair share of the upside then I reckon that this would keep me focused. Otherwise, I fear that I might just … drift. You understand?

Chair: Of course – perfectly understandable, all very reasonable. Couldn’t expect anything more.

Bob: Exactly. Everyone buys alignment.

Chair: A modest incentive?

Bob: Perhaps not so modest – the greater the incentive, the greater the alignment.

Chair: Inescapable logic. Agreed. Look, Bob, there is another issue. The Board is expecting a long-term commitment from our next CEO.

Bob: Long-term – what, more than three years?

Chair: Actually, we’re testing the limits of conventional wisdom by thinking that the company might benefit from a period of stability at the top. We’re hoping to find someone who will stay for at least five years.

Bob: Five years?

Chair: We value loyalty very highly – it’s one of our core values.

Bob: Five years? Not a problem … in principle. In practice … well … But I’m glad to hear that you put a high value on loyalty …

Chair: You seem a little concerned.

Bob: To be perfectly candid, I’m not sure that anyone buys into the idea of ‘loyalty’ these days. Nice sentiment … but really! That’s not to say that we can’t do a deal. We could always structure arrangements to remove the risk of my being drawn away by someone making a better offer. Let’s call it a ‘retention bonus’ – build it into the LTI component of my package.

Chair: I don’t think that this is what we had in mind. I mean loyalty is …

Bob: Everyone’s doing it. Just check with your remuneration consultant. Men must be what men must be.

Chair: Oh, of course – perfectly understandable, all very reasonable. Couldn’t, shouldn’t expect anything more.

Would you employ Bob after this conversation? Many a board would – and think that, in doing so, they were simply following best practice.