Is there anything wrong with executive pay?

BY FRANCOIS WILBERS
WORK DYNAMICS CEO

Over the last six months South Africa witnessed unprecedented wild cat strikes by workers for higher wages. Sadly these strikes lead to confrontation with the South African Police Services and workers were killed.

At the bottom of this lies a struggle by workers to make ends meet with their current wages and who can blame them?

Forget for a moment whether the farmers at De Doorns complied with the minimum wage determined by the Minister of Labour. The question is who can survive under the current economic circumstances on R70 per day? Then we do not even speak about the 25% unemployed who live far below the breadline.

…the income differential between workers and bosses is simply too large…

At the recent De Doorns strike one of the workers commented that the farmer should not claim that he does not have money for paying his workers a living wage when he recently bought himself a new vehicle and visits his beach house every weekend. I think the crux of the matter is that the income differential between workers and bosses simply is too large.

Compensation for senior executives, especially CEOs, has climbed to levels that strike many as excessive under almost any circumstances. The general conclusion is that the rich get richer, the poor are increasing in number, the upper middle class is having trouble staying even, while the lower middle classes and working classes are losing ground.

The common motivation for the relatively high executive pay is that supply and demand determines the market price to attract and retain top talent. Some business leaders claim that you cannot pay a good executive too much. Successful CEOs are often very influential. This influence does not come cheap and organisations are willing to offer generous salary packages because of the investor confidence these CEOs bring along with them. Unfortunately paying these inflated pay packages do not come with a guarantee that a reputable CEO’s strategies will be successful.

Considering the body of research available and public opinion here are some of the interesting findings:

  • Results of a review of the descriptive evidence for the operation of boards and two empirical studies suggest that social influence may be responsible for significant increments in CEO compensation beyond what economic theories predict. Generous pay awards, bearing only a weak connection to corporate performance, are explained in the context of the social psychology of the boardroom
  • The high income differential between executives and lower level workers at the same company lead to a sense of unfairness which lowers their morale and loyalty. This has a detrimental or counter-productive effect on the morale of the employees.
  • Executive incentives have over-emphasised short-term performance, encouraged excessive risk-taking, and failed to penalise poor performance.
  • In a survey conducted by Adcorp it was found that chief executives’ remuneration is not justified by several appropriate metrics, including (but most importantly) profitability.
  • Strikes in the petroleum and coal sectors, indicated that the excessive increases awarded to executive directors and heads of the relevant companies caused a serious breach of trust between employees and management.
  • Some executives do earn obscene amounts of money by any standard and the yawning chasm between the pay of company directors and the lowest-paid workers is too wide for comfort in a society where so many are unemployed and struggling to survive.
  • After reviewing empirical research, the International Labour Organisation concluded that there is little or no evidence of a relationship between executive pay and company performance.
  • The ethics of the growing differentials are rarely addressed in the literature on compensation. It is mooted that the lack of ethical scrutiny affects staff morale and performance by non-managerial employees adversely.
  • There would appear to be no evidence to suggest that the growing gap between the pay of executives and that of the average employee generates long-term enterprise value.
  • A combination of shareholder impotence, director self-interest and CEO domination has rendered many board directors favourably disposed – if not beholden – to overpay their corporation’s CEO at the expense of the stakeholders.
  • Wealth and inequality awaken justice concerns. Substantial gaps between what people think is just and what they see around them generate judgments of injustice, setting in motion a train of negative consequences for individuals and society.
  • Executive compensation and incentives systems have been shown to be dysfunctional, misaligned and short-sighted. Greed and narrow self-interest have thrived, and risk and stewardship have been too often ignored.

…there is little or no evidence of a relationship between executive pay and company performance…

Considering the above the author shares the concern of the remuneration ghuru Drucker that the current extreme level of income inequality is not sustainable. If the moral and ethical implications of the inequality in remuneration between executive pay and average workers are ignored it has the potential for more serious social convulsion than what was experienced at Marikana and De Doorns.

Business leaders should take up the responsibility for ensuring that ethical considerations are factored into remuneration strategies for the long-term interest of all the stakeholders of the business and not only the short-term interest of executives and shareholders.