The Chartered Management Institute’s National Management Salary Survey shows that the gulf between reward and remuneration at the top continues to inflate, while average pay remains flat. Ann Francke, Chief Executive at CMI says, it is time to burst the bonus boom balloon?
Executive pay has been a mainstream news topic in recent years. There has been substantial public outcry over “fat cat” salaries, particularly when juxtaposed against high-profile failings, as seen in the City, which contributed to the economic crash. We’ve lost sight of the fact that exceptional rewards were once, rightly, reserved for exceptional performance and not just for ‘turning up’. Worse still, we’ve seen some businesses making extravagant rewards for failure that has been at the expense of others, as well as practice that has turned out to be damaging and unethical.
For several years, CMI and XpertHR’s annual National Management Salary Survey has shown many managers have endured below-inflation pay rises, unsurprising given the current economy. This year though, the results show some inflation-busting gains, but only at the top levels. Company directors have enjoyed pay increases almost twice the size of the average UK executive over the last 12 months, with the differences largely due to sharp percentage increases in bonus payments at top levels compared with previous years. The gap widens further still among the sample of chief executives, whose pay rose five times as much as that of the average executive: as much as 15.8 percent including bonuses.
Across the whole sample of 43,000 UK executives, basic salaries plus bonuses rose just 3.0 percent on average last year, in line with the year before and trailing behind retail price inflation. In contrast, while the average basic salary for directors increased by just 2.7 percent, the figure jumps to 5.3 percent when bonus payments are accounted for. This compares with a much smaller 2.1 percent salary plus bonus rise for directors between 2011 and 2012. Perhaps these individuals have all indeed delivered truly exceptional performance. But, even if that is the case, and the UK’s flat-lining GDP suggests that, just perhaps, not all of them are, is it right that pay at the top outstrips every other layer of the organisation by such a distance? If organisations aren’t performing, leaders shouldn’t get these bumper rewards, especially when pay increases for all other management levels have been so much smaller.
This situation risks top managers become more distanced from employees at a time when employees’ pay, including more junior management tiers, is being eroded by inflation, when economic growth is limited or non-existent, and when the quality of working life is being undermined as working hours rise. Under these circumstances, more than ever, managers need to build employee engagement and a shared commitment to success. The Government is edging towards reforms to give shareholders more power to rein in executive pay, but companies also need to look at it themselves. Those responsible for setting pay should consider mechanisms that link the pay of top managers and other employees. At a time when too many companies are hitting the headlines for the wrong reasons, John Lewis’s recent 17 per cent bonus payment to all its 84,700 members, from shop-floor assistant to CEO, is a great example.
Models that increase employee ownership of their businesses should be encouraged, as long as this isn’t at the cost of basic employment rights. Companies should also track directors’ pay against both wider management and employee salaries and overall corporate performance to be clear where pay rewards are really justified. Fundamentally though, the question of high pay begs questions of how companies can move beyond narrow notions of shareholder value to make pay fairer and also more effective. The Salz review of Barclays’ business practices found that pay “tended to reward revenue generation rather than serving the interests of customers and clients”, and they are not alone. Other chief executives have recently enjoyed huge pay-offs on the basis of high stock market valuations which often overlook the broader context of their business. Astronomical pay can only be justified by stellar performance. Without that link and without a sense of fair play across organisations, top pay levels risk corroding employee engagement and trust in management, just when we need it most.