JUSTIFYING high levels of executive pay as a function of the supply and demand of leadership skill is dangerously simplistic, causing a crisis of credibility for business chiefs when leadership is needed to ensure sustained economic growth that creates jobs, builds capital and benefits society.
It is important to measure and incentivise short-term results and to maintain and grow the competitive spirit that is so vital to business success; even more important is that executive remuneration distinguishes gambling from investment and reasonable self-interest from naked greed.
With insight gained through relationships, experience and knowledge, the essential leadership attributes can be monitored and tracked but can’t be objectively measured as a set of numbers on an income statement, balance sheet or scorecard.
The formulaic approach to remuneration that tries to quantify so-called lead indicators like customer satisfaction or employee morale is frighteningly similar to how risk attached to sub-prime mortgages was falsely calculated and how the assumptions surrounding these scores became treated as fact when they were calculated and parcelled off to enrich bankers while destroying the world economy.
Since the late 1980s, so-called management experts have peddled a scorecard approach to leadership recognition and reward that purports to quantify directly measurable and attitudinal aspects of leadership. Governance is essential to executive culture and practice and to deciding senior executive’s reward. However, instead of realising that good judgement, not rules, were missing pre-2008, corporate governance is increasingly rule-bound and form seems to trump substance.
The scorecards and formulae that rewarded executives whose decisions and actions culminated in the 2008 financial meltdown, are unfortunately still applied, though neither discouraged nor detected that recklessness.
To get things right the tension between shareholders, executives, staff and other stakeholders must be creative and not destructive. This demands thoughtful reflection, observation and deliberation, through which individual effort is understood, in context of achievement; long-term strategic issues are offset against actual performance; the company’s ambition is offset against reality, and individual needs are recognised but weighed up against one another, as well as against the greater good.
Required discipline and discretion needs to be exercised in the context of deep and broad understanding of the business and the wisdom to see beyond their own ego and personal opinions. Such capacity is lacking among non-executive board members who, in South Africa at least, are often appointed for cosmetic, political reasons, or are retired executives who need to control, to be right, and land up competing with those they supervise rather than advising and guiding. Either way, there is too much personal insecurity at board level acted out as passivity or aggression, which results in poor handling of conflict and complexity and, therefore, of negotiation, which lies at the heart of effective leadership, remuneration policy and practice.
The water is further muddied by rent-seekers whose political connections ensure riches, or gamblers enriched by speculating in currencies and commodities under the guise of free trade and capitalism; but who add no economic or social value. These distortions enrich banking traders and middle men, while teachers, nurses and policemen battle to make ends meet. This makes no economic, moral or social sense.
When you are uncertain and can admit it, you pay attention; when you pay attention you engage with the world. Chief executives and non-executives need to adopt this humble attitude and learn to confront reality; have the confidence, risk appetite, resolve and resilience to bound uncertainty, inspire hope, and give direction to those they lead.
This is a tough job, which demands superior judgement, ethics and consistency and thus must be well rewarded.
They need to be wary of “experts” who sell systems which falsely promise to rescue boards and remuneration committees from their essential, yet vexing task of encouraging the hope, performance and learning, on which sustained organisational success depends.
Jonathan Yudelowitz is joint managing director, YSA and author of Smart Leadership.