Executive pay comes under the microscope

The biggest sovereign fund in the world – Norway’s $870bn oil fund – has at last decided to use its clout to influence executive pay. Corporate investors have been slow to the point of negligence in addressing the absurd salary and bonus levels, and the terms and conditions under which they are operated, of many top people. The issue has been festering as much among middle-class earners as among those few workers left on the factory floor. HURRA!

This move will come to be seen as the first real breach in the dam. From now on no CEO’s rewards are sacred, no shuffling of a company’s pension contributions will go unremarked. On balance we should all be better off for it, provided we watch out for, and mitigate, the unintended consequences or the unacceptable causes of the move. Nobody wants to frighten away competent Chief Executives. Nobody wants second-raters running the world’s big corporations. But nor do we want fat cats protected from a harsh world by golden hellos or life-prolonging parachutes regardless of their performance or honesty.

And that is where the Norwegian Sovereign Fund managers will find their first stumbling block. The following scenario is common. Business starts to go into a downturn. Shareholders blame board and board must blame someone – target CEO. Chairperson has to side with friends on board or CEO, chooses former. CEO chopped. HR, head-hunters and grapevine all engaged in desperate search to find replacement. Brief is “best person for the job regardless of cost.” Whizzo CEO found, writes terms and conditions into legal contract.
Scenario repeats.

Some thirty-five years ago I had a friend who made a living out of being fired from CEO’s jobs. He was hired for his spectacular CV – CEO of this, MD of that, he must know his stuff. Oh, he knew it all right. He knew the hirer was desperate, the HR and head-hunters were keen to get someone experienced and, boy, did he have the experience. I think he was CEO of about a dozen companies before someone cried out “The Emperor is wearing no clothes”.

Changing a legally cast-iron contract of employment is not a job for the intrepid. So difficult is it that I expect legislation will eventually be needed to restrain unreasonable contracts. Whether that will work in Panama we shall then find out. But we need to do more than that. We must educate our Directors and HR colleagues on the insanity of hiring people because of their experience. If their experience made them that successful why didn’t they build the business they were in? Or be hung onto ‘at any cost’ for their brilliant performance?

There is failure of succession planning involved in all hiring of top people from outside the business. The extent of that failure is epitomised by the HR Director of one company I knew asking an internal applicant for the job of head of a major division what he expected to be paid. On being told the HR chief said “We wouldn’t pay that even if we were bringing someone in from outside, Brian”. The put-down lost the company a top class man.

Internal candidates start with considerable advantages including knowing the culture, the people and the problems. What they lack is mostly the ‘new broom’ appeal of an outsider. Sweeping clean however often involves throwing out the good with the bad. Importing, or, better still, inspiring, a more creative approach to the business is not rocket science.

Internal or external candidate, whether you are Board, Chair, Head-hunter or HR there is only one reason for hiring someone and that is their attitude – to the company, to work and to their fellow human beings. If their attitude is right they will work well; if not they will fail.

Keeping CEO’s pay reasonable is not a matter of jealousy, it is a matter of common-sense. We talk about being global. There is nothing global about some of the pay checks we hear about today. They are so far into the stratosphere that they are completely out of sight.

But not, mark you, out of mind.