The current financial climate is characterised by great corporate uncertainty, best illustrated by high volatility in share prices, but also real wage stagnation for most and huge earnings inequality driven by those at the top. Against this backdrop the public may ask: shouldn’t firms be focusing on pay increases for the average worker, rather than on those at the top?
Board members will want to recruit and retain the best possible talent, ensuring the best executives are working for them and not for the competition. This can lead to dangerous bidding wars, especially when talent is scarce. Employers, it seems, are caught between a rock and a hard place. So what should they do?
Economic studies provide some useful guidance. They show paying above market rates and paying for performance attracts talent and motivates workers to work harder, wherever they are in the corporate hierarchy. But, because those at the top have the greatest influence over firm performance, it is vital that firms do all they can to secure the top talent via reward packages. Board members, shareholders and employees know this, even if they don’t always like it.
But economics also tells us that workers focus on what they are incentivised to do, ignoring potentially important matters that are not incentivised, even when they can be crucial to firm performance. New research also shows that CEOs in particular are notoriously hard to monitor; few know what they are actually doing with their time. So it is vital to align their interests with both the short- and long-term interests of the firm, packaging those rewards accordingly in a portfolio that ensures the executives see their medium-term futures as bound up with the fortunes of the firm.
How this is done will vary from firm to firm, and it is vital that others, perhaps non-execs on the board, aided by excellent economists, keep things under review and evaluate the performance of the top execs and the suitability of their reward packages. If employers can do this and communicate what they are doing in a transparent and timely fashion they will take stakeholders and the public with them.
Alex Bryson is professor of quantitative social science at UCL Institute of Education