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UNDERSTANDING TOP PEOPLES' PAY

THE ROLE OF COMPENSATION IN REWARD, MOTIVATION AND ESTEEM

The Elements of Compensation

But, before we start, some definitions

We will describe rewards that are paid in cash, or are directly convertible into cash, as compensation. Perquisites, such as chauffeured cars, use of company-owned property, and such benefits as pension rights, we will call benefits.

Some parts of the compensation package will be short- term, and usually paid annually. Annual salary and annual bonus come into this category.

Other elements are described as 'long-term' (usually 3 years) - Long-term Incentive Plans (LTIPs) and share options come into this category.

Nearly all top executive compensation packages contain fixed elements, for example, annual salary and variable components, related to performance, such as annual and long-term bonuses.

The total compensation and benefits package of a top executive will also contain some pretty hefty payments towards such benefits as pension. Should they reach full retirement age, most top executives will have a pension 'pot' worth many £millions. Even those who leave before retirement age usually take a proportion of a very large amount.

Money and Motivation

One of the authors once had a colleague who was possessed of a very simple idea. When he wanted his staff to do something, he used to promise them a cash bonus. "That's the way to get them motivated", he would say, "Just give them a bonus and they'll do anything I want".

And indeed, at a superficial level, he was right, but closer examination revealed that the world was not quite that simple. Two outcomes were particularly noticeable.

First, it seemed that the size of the motivational bonuses had increased markedly over time, causing much resentment in other parts of the organisation. Secondly, it was apparent to outsiders that our friend's department was for the most part out of control, with his subordinates doing just as they pleased, without much concern for their relationships with others, or the underlying quality of their work. Now and then, they would stir themselves to put in a special effort or to meet a deadline, but only if there was a bonus attached.

So our friend was right, bonuses did motivate, but the returns rapidly diminished and the bonuses only influenced a part of his subordinates' behaviour - by relying on bonuses to do his motivating for him, he actually decreased his influence over them.

When he moved on to greater things, his successor found huge resentment and resistance when he tried to take an intelligent interest in what his new subordinates were doing and expected good performance without bonuses. Eventually, he had to replace most of them.

The Roots of Motivation

So, if bonuses are not the whole answer to motivation, what is?

First, let us take a step back. It is probably true to say that the roots of motivation lie in two factors:

1. Personal characteristics together with individuals' beliefs and values will cause them to respond and react to a variety of different stimuli. Where groups of individuals tend towards similar sets of values that can be described as a culture.
2. The pressures and stimuli coming from the environment surrounding people will also have a potentially very powerful effect on their behaviour and priorities.

Let us take this simple construct and apply it to our archetypical top executive, the CEO. Our data sources are mainly business psychologists and experienced search and compensation consultants, though this is heavily supported by international research and our own experience.

To begin, are there any shared values and beliefs or common characteristics that might differentiate CEO's and other top managers from the rest of the working population?

Research shows that CEO's might be differentiated from the 'average' employee in a number of dimensions.

• They have strong egos - and are strongly motivated to have their way and be somebody in the world.
• On a related note, they are highly driven, ambitious and resilient - they have had to be to get there. This also means that they are generally motivated by the manifestations of status and success, even if they deny it in public!
• They are unusually good at playing the politics of organisations - this also means that they are quite vigilant about the opportunities and threats that are presented by powerful people and forces in the world around them.
• They are generally accomplished at presenting themselves in public - even if this means hiding parts of themselves that they do not wish to be seen.

Secondly, what about the environment in which the contemporary CEO of a large company 'swims' (or sinks!)?

Gurnek Bains, the CEO of YSC, one of the world's leading business psychology consultancies, observed that top management was becoming more and more like politics, in that presentation to a large number of audiences and the need to cultivate an image and appearance was becoming as important as what CEO's actually did in the relative privacy of their own organisations.

Moreover, remarked Bains, more and more CEO's periods of tenure were, like the careers of politicians, ending in apparent failure - and this was becoming exacerbated by the compression of timescales forced mainly by public exposure in the press and financial markets.

So, if we quickly integrate our two dimensions, values and environment, we have people with big egos who are strongly driven to do well and to be seen to do well, with well-developed 'political' antennae and above average presentational skills living in a very public, pressurised and competitive, environment, rich with messages and evaluative commentaries - above all, an environment that contains all the influencers that will have a very powerful and visible impact on personal success or disaster.

Compensation is the most precise indicator of Status, Esteem and Success

Where, then, in all of this, does compensation fit? It is crucially important, because in addition to it being a source of wealth and financial well -being, it is the most comprehensive and accurate measure of success and a CEO's (and other directors') relative position in the peer pecking order.

Other manifestations of status and public esteem may be powerful, but short of extremes, like getting fired, they are much less accurate than pay in determining how CEOs' are placed in the competitive world that they inhabit.

When significant elements of remuneration are directly related to the company's share price the relationship between pay, esteem and perceived performance become even stronger.

We will look more at this in a subsequent chapter, but all large companies commission and carefully examine surveys by compensation consultants that grade their top management against others in regard of pay, bonuses, stock options, benefits and publicly stated perquisites, such as pension rights.

The measurement metrics are extremely accurate, so CEOs' can know exactly where they stands against peers - are they on the Median, at the Upper Quartile, Upper Decile, Lower Quartile or what, against all of the elements of compensation and benefits?

In addition to surveys by consultants, there have been shadowy bodies like the Chairmens' Group, founded in the early 1980's and still possibly extant to-day. Membership was open, by invitation only, to the chairmen of large companies. Confidential information was shared that enabled the lucky members to meet in privacy and compare notes on weighty matters including the relative sizes of their compensation and benefits!

The whole affair was shrouded in secrecy and only members were supposed to have access to the data generated, but one of the authors used to spend many happy hours compiling information on behalf of at least two chairman bosses.

Describing Top Executives as Individually Greedy is too Simplistic

So, pay is not only important in its own right, but it is an integral part of a system of comparative measurement that tells individuals where they stand in the world.

This fact has some profound implications:

Describing individuals as 'greedy' is far too simplistic - what they tend to want is success, especially relative to their peers - doing a good job, having a good career, approval by those who matter, possibly an honour, and a degree of security.
It is therefore misleading to talk of individual greed and 'Fat Cats'.

What is far more important is what might be described as 'institutionalised excess' - the 'system' that ratchets up compensation and encompasses all top managers, whatever their individual urges and predilections.

Top managers are generally highly motivated, often driven people. Many of them have very strong ego's and are highly ambitious - they would not have otherwise risen to the top. The CEO is the archetypical top manager. They as a class work extremely hard, often sacrificing significant parts of their private lives to do the job - problems with personal relationships and divorce are not uncommon.

Today, most CEOs of larger quoted companies live in a sort of goldfish bowl.

They, with the chairman, are the most significant external faces of their companies.

They are the quite visible within their companies, and often have a demanding following, which will evaluate their actions, behaviour and success constantly. Remember, there is a close relationship between the compensation of the boss and that of his/her close subordinates!

Their actions, demeanour and performance are the subject of constant scrutiny - one CEO described the attentions of the press, investment institutions and sell-side analysts as like being constantly followed by a 'poisonous swarm' of buzzing insects.
He was also aware that his subordinates watched his actions, external image, compensation and demeanour very closely!

Tenure in the top executive roles has dramatically decreased over the last 20 years or so, as public scrutiny and 'accountability' (to the aforesaid swarm) has increased.
It is now the case that the tenure of a FTSE CEO in position is somewhere between three and four years, and more and more are coming to a sticky end at the hands of militant investors.

Think. If you were a person with the profile we have described, working in the environment we have outlined, making what (to many) might seem great sacrifices at the altar of success, what would you do?
It is not surprising that many top managers might be tempted to amass as much as they can in their short spell in the sun.

Maybe what many describe as greed is simply a rational response to living in a risky, hugely pressurised environment..

What we can say with some certainty is that the issue of excessive rewards for those at the top of large companies cannot be addressed by focusing on compensation alone - the whole environment surrounding top managers, their companies and their investors will have to be addressed, as will the criteria and timescales for judging their success and failure.

In the next chapter we will move on to look more closely at the design of pay and benefit strategies and how this may drive or reflect behaviour and priorities.