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Executive rivalry, ego drive up pay packages

The good news is top executives are concerned about fairness when it comes to remuneration. More important than the amount of money they are given – and other valuable stuff like options – is that their package is “fair” when compared with other executives.

The bad news is executives tend to believe “fair” remuneration merely means that they should be getting more than their peers – anything less would be “unfair”. So “fairness” in this context should not be confused with some sort of broader socio-political concept.

On the issue of “fairness” as executives see it, according to the report on executive pay released recently by PwC and the London School of Economics (LSE), “most executives would choose to be paid less in absolute terms but more than their peers”.

This is a crucial part of the “ratchet and ratchet” phenomenon that drives executive pay. In order to justify the absurdly generous remuneration packages that remuneration committees and consultants recommend, which are always at the top end of the comparative group, boards have to argue that their particular executives are better than all the rest in the market.

Regardless of how well or badly the company performs, after listening to these committees and consultants, executives come to believe that they are above average. The result is that this year’s top pay in a particular peer group becomes next year’s base.

Indeed, the “amorphous” market also latches on to the notion that the current executive team is the only one that can do the job. Which is why when Bob Diamond, who has been awarded the sort of packages that make him seem indispensable to Barclays, quit yesterday, the market reacted by cutting the share price. The market is saying, “we agree with the remuneration committee that Diamond, despite overseeing some very dodgy practices, is indispensable to Barclays, without him this enormous banking group will flounder because there is no-one else among the tens of thousands of employees who could do the job”.

We seem to forget that one of the key functions of the top executive team is succession planning. If done properly, this should provide stakeholders with the comfortable feeling that the organisation is not a one-man show. But this is exactly what current remuneration packages scream out.

The inevitable conclusion from this obsession with “fairness” is that companies should be prohibited from disclosing executive remuneration. If such discussion was illegal not only would the huge industry that advises on executive pay be wiped out, boards would have to work out what value an executive contributes. They would no longer be able to outsource this critical decision to consultants who benefit from exaggerating that contribution.

In addition to “fairness” executives also want “recognition”. According to the PwC/LSE findings executives don’t care so much about the quantum of the value of long-term incentives as the fact that it indicates their contribution is recognised and valued. This means that there is probably considerable scope for cutting back on the monetary value of incentives and replacing it with other cheaper, albeit arguably more valuable, forms of recognition.

Perhaps we could use something like those gold stars that teachers used to dish out to well-performing students. The relevant government minister could be roped in to award national stars for excellent corporate performances. And for outstanding performances, individuals could be awarded the freedom of the JSE.

If this all sounds rather puerile then we can be assured it will work in the childish world of overpaid executives.

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