This week Financial Times reported on the shareholder resistance that came up against BP's Bob Dudley's 20% pay rise. Hardly surprising, seeing at this pay rise will have come out of money they invested, or at least money that could otherwise have go to them in dividends.
Excessive pay within higher management has been the main obstacles that businesses have face in building and maintaining trust. Be that for shareholders, and more of a general perception of the business. Personally, when I hear that a CEO has given themselves a nice little pay rise, or bonus for that matter, I do become a bit more wary. Not necessarily for the business itself, but more in the sense of "is my money just going straight into their pocket?" I'd like to think that the money I'm paying is in some way going to help the company grow, towards sustainability or something similar. Not going towards paying for a nice holiday home in the Bahamas.
The FT also states the excessive pay gap is so out of line that CEOs "risk being treated like aliens". I think that fits in quite nicely with the terms "out of touch with the real world" and "how the other half live". I think it is true that many CEOs may almost appear to be in a world of their own and have no concept of working to get by. Yes, I agree that many will have worked hard to set up and grow a business and will have put in the hours to get to where they are now. But how do they decide on these pay rises and bonuses? Do they get into work one day and think "oh good job this week, you deserve an extra £1m!"? And why not give everyone a little extra?
It is argued that no single solution will fully bring the pay gap down, however FT suggests a few possible ideas that, when used together, might just work.
Firstly, reduce complexity. There are many different standard for accounting used around the world, meaning what is seen as unethical in one country may be acceptable in another. It is also argued that many remuneration committees often do not understand the value of what they are handing over. Not necessarily due to them being lazy or not caring, but because it is nearly impossible to calculate. I understand that calculating and keeping track of all the wages and salaries within a company can be difficult, but surely they will know if the company can afford excessive pay rises and how this may look to investors and the public?
Secondly, making transparency work in favour of restraint. If companies benchmarked their pay and targets against similar companies, they will be able to ensure that no unwanted attention to drawn to them over pay gaps. However, this can often lead to the Lake Wobegon effect where nobody would want to be paid below the average amount. If everyone is using each other as a benchmark, how do you set the initial pay level?
Thirdly, and most importantly in my opinion, link CEO pay to the performance of the company. This seems pretty straight forward to me. Everyone has their initial set base pay, then pay rises or bonuses can be given according to how well the company has done that year. This may help directors think a little bit more about where the money is coming from and how it is affected by performance.
I know I have spoken quite harshly about CEOs so far in this blog, so I believe it is also worth talking about Richard Pennycook, CEO of Co-operative. Earlier this month he insisted on taking a 60% cut in his base pay following the Co-op's turnaround. Whilst I do think that 60% may be a bit excessive, this is the kind of lead that CEOs should take in terms of pay. It is likely that CEOs will be on a hefty pay package, far higher than other workers, so if the company is facing financial troubles, is it really so wrong to suggest that they sacrifice just a small percentage of their pay?
My final note on this is that companies should consider how their values are reflected in their pay policies. If the company is promoting an ethical brand and equality, a large pay gap doesn't really reflect this. It should also be noted how a company's pay policy can impact their license to operate and the perception this gives out to the public.
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