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Posted by Andrew & Nada on 16th July 2012
Mind the gap – executive pay reaches new heights

New research from Professors Nada and Andrew Kakabadse and Filipe Morais, observes rocketing levels of executive pay in large, multinational firms, while average employee earnings stagnate… 

While public anger and frustration rages around excessive executive pay in return for apparent failure and poor performance, our team set out to review the impacts of pay gaps between senior staff and the rest of a company’s employees on corporate performance.

The results indicate that the size of a company directly influences pay inequality. The bigger an organisation is, it seems, the greater the gulf between executive and employee pay.

Additionally the more a business operates internationally, the quicker executive pay rises while average employee earnings stagnate. This was particularly evident in one Portuguese retailer reviewed in the study, which saw massive pay disparity after it switched from the domestic to international marketplaces. In another case, a CEO and executive team’s salaries increased considerably at a UK-based non governmental organisation which began operating abroad, while staff salaries stayed the same.

Our findings also challenge established beliefs about morally correct behaviour and the fair distribution of rewards. In fact it appears that current practise de-motivates the less well paid by being socially divisive as well as economically damaging,

Of course directors need to be paid for the job they do, but how can someone working lower down in an organisation be motivated knowing that the competitive advantage of their firm is based on a workforce that is skilful, but remarkably underpaid? At the same time the pay and the reward package of executives has grown out of all proportion. 

Pay needs to be fair and reasonable if the consensus that provides companies with their licenses to operate is not to be undermined.

CEO pay in Japan reminds us that top executives are not just remunerated according to market performance, but in the calculation of their package cultural acceptability is a significant consideration.

As an example, on 30 June 2010, the Japanese Securities Exchange (JSE) authorities introduced a mandatory disclosure for Japanese companies whose executives earn more than 100 million yen ($1.1 million). According to the JSE fewer than 300 people at Japan's 3,813 public companies earned enough in 2009 to require disclosure. The chairman of Toyota made $1.5 million in 2009, whilst the CEO of Toyota made less than $1.1 million. These CEOs aren't paid what the market will stand. They are paid what the culture will accept.

The reputation and survival of such companies are not determined by a pure free-market logic, but also through a social acceptance that companies earn through a permanent scrutiny of their activities in a wide range of forums: media, social networks, market analysts, rankings, reputational indexes among others.

One billionaire Chairman participating in our study suggested the executive pay explosion is based on a deep cultural norm in the US which has, in turn, exported a view of short-termism globally.

He commented: 

I don’t know if remuneration excess was responsible or not for the financial crisis. What I do know is that there is today a short-term vision in the companies not evident in my time. Many of these remuneration packages have a direct link to share prices, and so encourage short-termism. This is what really worries me”.

He continued by describing the criteria he used for determining executive remuneration in his company:

‘There is a job description, there is a job evaluation and we pay accordingly. In my time executives only had a salary. However, today I’m in favour of a variable compensation as an incentive for the executive to perform better, but as with everything there are limits. I don’t know what the limits are”.

It is up to society as a whole to decide one way or the other what the limits are.

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