An anonymous contributor provides some food for thought on the executive pay debate, challenging the mantra that you need to pay top dollar to “attract and retain the best people”.

This seems to be a reasonable explanation – at first – but with a little thought and a tiny sniff, it quickly starts to stink. The reason, dear readers, that it stinks so much, is that this disheartening company line is assumptive, simplistic, tenuous, and demonstrates a gross lack of innovative thinking. It is time to debunk the greatest myth in corporate Australia.

We all know the adage that “if you pay peanuts, you get monkeys.”

The Board’s explanation follows parallel reasoning.

However, we merely have to look towards the countless thousands of very fine teachers, nurses, academics and charity workers to realise this thinking is dangerously simplistic and inaccurate.

The assumption that extremely high pay attracts the most talented managers is similarly flawed. In economic terms, this is because the labour market is not “perfect”; due in part to limited workforce mobility and the incorrect assumption that reward comes solely from money.

Of one thing we can be certain; huge pay packages will attract the managers for whom huge pay is the most important thing. Let’s not delude ourselves here – these managers will most probably not be the best or most talented.

Anyone who has worked in a corporate environment would acknowledge that the best managers are not typically preoccupied with money, but with taking pride in their people, their work and their company.

The pay slip at the end of a month pays the bills, but it rarely gets you up in the morning.

In terms of reward and motivation, it would be disingenuous to argue that monetary concerns have the highest importance for people. Perhaps I move in narrow circles, because out of everyone I know – from fields as diverse as IT, financial services, telecommunications, consumer marketing, not-for-profit, the arts – not a single person is primarily motivated or most ably rewarded by money.

Invariably the intangibles are the things which motivate and reward – personal growth, a sense of achievement, the challenge or satisfaction from doing certain tasks. Relying primarily on money to reward and motivate people either demonstrates a distinct lack of creative thinking, or a desire to avoid the bigger question of what makes people tick.

The most galling suggestion from certain parrot-like Chairmen is that Boards must pay these enormous amounts to retain senior management. I am sorry, but what rubbish. Boards are dealing from the bottom of the pack here, because they’re the same ones paying huge amounts in termination packages to CEO’s who leave early, which suggests they’re providing an incentive for CEO’s to leave!

However, the important point is that if the Board cannot provide the environment, motivation, and desire for management to stay regardless of the salary, then I believe they are failing in their duty. They can address this by building a compelling vision for the future, emotionally engaging senior management and by challenging themselves and others to build something greater than the individuals.

Instead, we could be forgiven for thinking that they appear to be at the mercy of capricious and manipulative managers who may or may not be persuaded to stay by money. People who stay for the money, will leave for the money. They’re not the people you want working for your company.

That may all appear slightly wishy-washy, so here’s something to chew on.

There is no evidence to suggest that extremely high remuneration leads to superior company performance. That creates a conundrum for Boards whose narrow thinking goes along the lines of – superior performance requires superior management who require superior pay. So, they think, let’s dangle a huge carrot out there and the rest will fall into place! Ba-baaaw.

We already know the most talented managers will not necessarily be attracted. There is also evidence (see below) to suggest that for extremely successful companies, the way management is remunerated (ie shares, salary, options etc) is not a determinant of their success. That means that all the time the Board spends on crafting packages consisting of bonuses, options, hurdles, sliding scales, shares, benefits and salary, might actually be a complete waste of time.

The obvious question now is who are the most talented managers and what attracts them to a job? A good start would be to read “Good to Great; Why Some Companies Make the Leap and Others Don’t” (Sutton, 2001), which debunks various myths of successful companies. Their 5-year research project found that the leaders of the some of the most successful companies in the United States had several things in common.

They were not corporate superstars or charismatic leaders with big egos. Money or options did not motivate them. They simply had a driving desire to build successful long-term organisations based on highly disciplined thinking and action. These so-called “Level 5 leaders” were relative unknowns. Insiders who loved the company more than any title it bestowed on them.

Selfless, ego-less workers who intimately understood the culture and purpose of their company.

People who thought about the organisation beyond their own tenure; who wanted to build something of worth and something which was greater than themselves. Unfortunately, such people are rare, however it is not money which uncovers them, and this is what scares Boards (even those aware of this ‘radical’ concept). They appear not to know how to uncover such talent so appear to rely mainly on the ‘big blunt carrot’ theory.

If all this is true – that high pay doesn’t necessarily ensure company performance, and that it does not always attract, encourage and retain the “best management”, why has it apparently proliferated in the last several years, and why haven’t Boards kept it in check?

One argument (gathering momentum) is the lack of true Board independence. The Horwarth Corporate Governance Report 2002 went into great detail to explain the difference between “independent” and “non-executive” directors. In a nutshell, it argues that “non-executive” directors are not truly independent if they have related party transactions, were previously company executives or if they hold significant stakes in the company.

This meant that some high-flying companies including Harvey Norman failed the Horwarth scorecard.

The important point is not that companies will fail with a lack of “independent” directors on the Board, but that the potential exists for executive directors to exert greater influence on executive pay packages.

This is a critical point because these same Boards (sometimes chaired by ex-CEO’s) populate the Audit and Remuneration Committees, and as Warren Buffett points out – too often such committees are comprised by cocker spaniels, whereas Doberman pinschers are required! The discomfort of many directors in the face of justified shareholder questioning further suggests that Boardrooms more closely resemble a day spa more than a challenging, questioning, inquiry-like arena!

More importantly, Boards must challenge themselves to look beyond simplistic solutions and refrain from patronising justifications for the unjustifiable. At the least, they can assume that shareholders will continue to become more active (GO CRIKEY, GO CRIKEY!) which may hopefully spark greater thought, focus and attention on some of these problems. I for one do not accept that excessive pay is a cost of doing business.

Unless Boards take up the challenge of finding more innovative solutions to attracting, rewarding and retaining senior executives, not only are they failing in their duty, but doing a disservice to the future of the company.

Peter Fray

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