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Paying the Piper

Optimize Blog - September 16, 2010 - 0 comments

As countries drag themselves out of the recession, the spectrum of accusations and recriminations becomes ever more broad and colorful. Criticism of the level and validity of bonuses paid to banking executives is perhaps unsurprising, especially after the role they played in the economic collapse (which was brought about at least in part by bankers becoming high stakes gamblers, encouraged to play ever riskier odds). But the new hot topic is the level of pay enjoyed by senior executives of companies in a variety of sectors.
Disgruntled shareholders are increasingly challenging the boards of various companies accusing them of having the balance wrong – with large sums of money directed toward the board and executives, seemingly at the expense of the businesses themselves. The common accusation is one of a lack of value for money.
So, are executive salaries appropriate and do the beneficiaries actually earn it?
We have many years of experience of working as and working with senior executives, so perhaps we have some genuine insight into this question. We’ll be in the red corner whilst someone like management writer David Bolchover is in the blue corner. Mr. Bolchover protests that highly paid executives are part of the ‘talent myth’.
“The ‘talent myth’ states that there are a small proportion of high flying employees who make a huge impact on their companies success and that those employees are extremely difficult to replace,” he says. But lots of people have the characteristics needed to be successful, Mr Bolchover insists, so why should they be so hard to replace?
The answer, he reasons, is that there is a whole industry consisting of other high-paid people, institutional shareholders, pay consultants, even journalists and academics who have a vested interest in sustaining high pay.
Jon Terry, head of reward at Pricewaterhouse Coopers, says there are also problems within companies. Weak or low-quality remuneration committees setting vague or unchallenging bonus targets can easily allow high bonuses to be paid, even when companies have performed poorly.
Now we certainly see our fair share of poorly structured bonus schemes and, without exception, every incentive scheme delivers some form of undesired behaviour. We also occasionally see executives that receive large remuneration packages that they appear to barely earn, but the exceptions perhaps prove the rule.
It is easy for non-executives to make statements around what is and what isn’t a fair level for executive pay but working closely with executives we see the day to day realities of these roles first hand. These roles generally entail balancing extraordinary complexity, demanding stakeholders, making harsh and tough decisions, building and sustaining alignment, ensuring the well being and safety of the workforce and their family units, structuring complex finances…….the list goes on. There is also the constant demand and impact on the executives’ families and social circles.
We agree with Mr. Bolchover that ‘lots of people have the characteristics needed to be successful’ but faced with the day to day challenges of actually carrying out the role, what incentive is there for people to aspire to the senior roles? The point is that potential does not always get realized.
We’re not suggesting we should feel sorry for the people at the top – they’ve made their choices. However, if the incentive (financial or otherwise) is not there for these people to succeed and to push themselves to progress, then the talent pool becomes depleted very quickly.

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