Are CEOs worth their pay?

man contemplating moneyRising inequality and increasingly insecure employment in the 21stCentury has focused attention on what has come to be seen as a disproportionate level of CEO pay in many companies.

Recently the world’s largest fund manager, BlackRock, added its voice to the debate warning the chairs of the UK’s biggest companies to stop making large payments to CEOs when they leave and in lieu of pensions and said it would only approve directors’ pay increases if employee wages were also increased.

The question focuses attention on how CEO remuneration is assessed, by whom and over how long a period should their performance be measured.

It is no longer deemed good enough to justify CEO rewards by the need to pay competitively against their peers in order to retain them. Short-term thinking in providing high returns to investors and shareholders as a measure of a CEO’s effectiveness has also come under increasing scrutiny as such returns may not be in the best interests of a company’s longevity.

What skills does a good CEO need?

The effective CEO must be able to think strategically in the short, medium and longer term interests of the business they are leading and identify achievable goals.  They must be able to communicate, motivate and delegate to people effectively.

Giving and receiving feedback to and from all levels of the organisation will help them to really know what is going on, not only about productivity and profitability, but also to understand their staff and in particular motivation and morale, which may be crucial to business success.

In a fast-moving economic world, the CEO must also be flexible and agile, knowing when they need to learn and willing to do so. Complacency is not an option. Critical thinking is crucial.

Interestingly, in 2015, when PwC asked CEOs about the capabilities they felt were important a significant number mentioned humility, the ability to maintain a modest opinion of their own importance and capabilities which seems to be forgotten when it comes to pay levels.

How should CEO pay be decided and by whom?

Generally, in large companies the board of directors will approve CEO remuneration annually, often based on assessment by the company’s remuneration committee. The board’s recommendations will usually then be approved at the company’s AGM, or not, given the growing prevalence of shareholder rebellions.

A major difficulty is that any assessment will be largely results-based.  Have profits increased significantly or in line with a stated target? Have the goals for the year been achieved? What is the level of dividend payable to shareholders and how has it changed since the previous assessment?

But this is a largely top-down approach that can lead to a very short term view and includes no consideration of views, conditions and remuneration of employees, seeing them largely as a cost that should be kept under control rather than as active contributors to the health and longevity of the business.

These are all issues that are being examined in the Government’s Green Paper on Corporate Governance published in November 2016. It has arguably been prompted by the disaffection of those large numbers of people characterised as “the left behind” or “just about managing” that led to the majority vote for Brexit. There is still time to contribute to the consultation for which the deadline is 17th February.

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