The one with the fat cats

I attended a lunch recently and found myself sat next to a gentleman who started working as a Human Resources consultant in 1964. Apart from being a very engaging and charming person to sit next to at lunch I was fascinated to understand how he felt our profession had change and evolved in the 47 years since his consultancy career started [I should mention he’s now retired].

We talked about loads of things including the evolution of personality and ability profiling, the role of HR in the organisation, the role of consultants to the organisation and ended up talking at some length about executive reward. The organisation he worked for (and later lead) were at the time (and are still today) very well-known for their work in reward benchmarking and the development of reward structures for organisations.

In the course of discussing some of the assignments he lead and illustrating that whilst the players (and the playing field) have all moved on the game is still the same he shared a piece of information that in 2012 seems astounding. For the CEOs of several big name (and still very powerful) FTSE100 companies the variable elements of their reward could not be more than 100% of their base salary and that their base salary could not be more than 15 times that of a new graduate joining the business. This was from work done in the early 1970s.

So let’s put that in 2012 context….

According to the Association of Graduate Recruiters (AGR) the average graduate salary in the UK will rise in 2012 to £26,000 (we won’t discuss how many graduates can’t even get jobs). That would put the base salary of the CEO at £390,000 and his or her variable reward at a maximum of £390,000 to make a total package of £780,000.

According to Income Data Services (IDS) from data published in 2011, the average total reward for a FTSE100 CEO was £3.8M. Which if you were to use the 15x multiple backwards would mean graduates would be earning £253,333 – nice work if you can get it!

The conversation went on to whether organisations have become that much more profitable or productive to warrant the significant increases in CEO reward (neither of us thought they had) or who were the first to start the journey to ‘mega-reward’ (according to him – the Americans) and I came away from lunch pleasantly replete but with a genuine disquiet.

Whether it’s the long forgotten pay off that Bob Ayling received when ousted from British Airways or the front of mind numbers being discussed for Barclays CEO Bob Diamond I am often loath to jump on the ‘their all fat cats’ band wagon because firstly I have limited understanding of the actual context (does Diamond’s reward contain elements from when he VERY successfully lead the Capital division?) but more importantly ‘they’ are being paid under deals and agreements negotiated with organisations that have structures and governance with respect to reward.

I don’t for a moment think leading an organisation is easy. Like any leader the success or failure of the endeavour will rest with the CEO. With the pressure of market forces should Stephen Hester really have given up his bonus? Should reward be so significantly skewed to the leader? Should reward from a bountiful year be clawed back in a fallow year?

It seems to me that rather than shouting and balling at individual cases and feeding the media witch hunts over an individual’s negotiated reward is it not incumbent to the human resources profession to reexamine the reward governance and structures and try to innovate to new structures that ACTUALLY reflect the value a leader has brought to a business?

It was a very nice lunch though….

Update April 28th 2012:

So yesterday at Barclays AGM there was significant disquiet over executive pay with a significant portion of shareholders voting against the executive pay recommendations and also against the re-election of the Chairman of the Renumeration Committee… [More detail can be found here]

3 Comments

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3 responses to “The one with the fat cats

  1. In answer to your question about whether organisations had become more profitable to warrant the rewards the answer is no – not in the same proportion. I think there is some research out there so i will try and dig it out.

    I was lucky enough to see Ram Charan talk a couple of years ago about the global meltdown and one key factor he identified was executive pay in terms of driving behaviour. His point was that the total pay aside, it was the disproportionate nature of the variable element that casuses the issues.

    If you look closer to home we all know the problems with roles that reward incumbents with high levels of commission, where the variable element is very high. It drives behaviours to secure the variable. Hence double glazing sales, recruiters, telesales folk etc are often lambasted for their behaviour. One look at the financial sectors poor reputation for inappropriate selling of endowments provides another example.

    When you reach higher paid middle management roles – in the £40 – £150k bracket the variable shrinks significantly – anywhere from 5% to 50% of base. At this level, the base is what matters.

    When you get to the highest levels – CXO’s – it changes back to massive variable – and associated behaviour. Ram Charan was right to pinpoint the reward structure as a core component of market and corporate failure – CXO’s have become double glazing salesmen on steroids.

  2. Pingback: The one with the hospital pass | Masters or Bust

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