The annual reporting season, amidst the current recession and what Lord Turner at the Financial Services Authority called “the biggest crisis in the history of market capitalism”, was bound to produce the obligatory headlines we have seen recently criticising executive excess. Shell’s executive remuneration report was voted down by investors and sizeable minorities have voiced opposition at companies such as Next and BP.
Stephen Hester’s multi-million-pound pay deal as chief executive of government-bailed-out Royal Bank of Scotland and intimations of record bonuses at Goldman Sachs led even Lord Turner to express concerns at a return to “business as usual” in executive pay and bonus land.
So what can employers do to avoid infuriating the public, investors and their employees, while still retaining and motivating executives who themselves are facing some pretty tough challenges right now? Renouncing and suspending executive bonuses, as at Network Rail, voluntary executive pay cuts, as at BA, and executive pay freezes while still awarding increases to the lower paid, as at ITV, will all help, but are probably only temporary sticking-plasters.
First, employers must assert in their reward strategies the importance of fair reward. One firm I admire says its objective is “to strike the right balance between internal relativities and external market forces”, rather than blindly following market data, particularly when the employment market is so soft.
Second, there must be consistency of approach with, for example, a median market stance targeted at all levels in the organisation, not just for some groups. Executive bonus plans may need to be different from other employees’, but they should automatically not pay out if general staff plans fail. Appropriate methods of pay management, such as objective job evaluation and pay banding, should apply to all, reversing the fashion to remove executives from such arrangements.
Third, there must be procedural as well as distributive justice. Reward outcomes must be, and be seen to be, fair. Well-informed and constituted remuneration committees should be required in all sectors. I sit on a number of such committees in the public and third sectors and they play a vital role.