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A fair day’s pay?

first_img Comments are closed. Related posts:No related photos. Previous Article Next Article While corporates have an image for poaching top staff from rivals with hugefinancial enticements, research seems to show the opposite is true. Many CDOsare long-standing one-company people whose loyalty is eventually rewarded withthe top job. James Johnston reportsMedia hyperbole and political points-scoring often obscure the importantconcerns that lie behind the issue of CEO pay. High-profile scandals, such as the Robert Maxwell pensions affair, havehighlighted the importance of companies putting adequate safeguards in place. The absence of a link between executive rewards and company performance mayindicate that internal controls on managerial discretion leave something to bedesired. Trade and industry secretary Patricia Hewitt echoed public anger atthe seemingly relentless rise in directors’ pay last November when she said:”All too often directors are lavishly rewarded for lacklustre or even poorperformances.” Quite apart from the spectacle of unjustified enrichment, there is also theworry that badly designed CEO remuneration packages may damage profits,shareholder returns and jobs. Union leaders have been particularly vocal in their criticism of thejuxtaposition of inflation-busting pay rises for directors and the more modestsettlements for their members. Responding to an Incomes Data Services survey onexecutive pay, TUC general secretary John Monks said last October:”Executives’ pay rises show no sign of letting up. We need to see someboardroom restraint especially in such uncertain economic times.” It is possible that if worker discontent on this issue is not addressedsatisfactorily, it may eventually dent worker morale, lower productivity andsour industrial relations. When defending high levels of executive pay, the most commonly heardjustification is that they are needed to attract, motivate and retain the bestexecutives for Britain’s leading companies. Underlying this view is a beliefthat CEOs are highly-mobile, market-responsive workers who will quit one joband move to another as soon as it is financially beneficial. Yet it is difficult to find good evidence on the extent of mobility amongtop executives. Recent research from Paisley Business School suggests most CEOshad not been lured from rival companies but had risen through the ranks, oftenafter a long-term employment relationship. On reflection, there are good reasons for believing companies may prefer topromote internal candidates: ● Long tenure may be a sign that a bond of mutual trust and respecthas been forged between the CEO and firm. ● Successful bonding may stimulate the acquisition ofproductivity-enhancing, company-specific skills. Executives are more likely toexpend effort on non-transferable expertise if they expect the employmentrelationship to last. ● CEOs who underperform will quickly come under pressure frominvestors to leave the company. That a CEO has held his or her job for sometime is in itself an indication of some success. ● Elevating an internal candidate to the post of CEO is less riskybecause the selection committee may already have high-quality information onimportant personal traits such as honesty, loyalty and motivation. It would notbe surprising if companies were even willing to pay a premium to avoid therisks connected with hiring a newcomer to such a pivotal post. ● Firms filling top-level posts from outside may find this damages themotivation and commitment of failed internal applicants. However, there are circumstances where an outside applicant will befavoured. If there is to be a shake-up at the top of a failing company,shareholders may demand a new person be hired. Whether a company will promotefrom within or hire from outside will be the outcome of a delicate balancingact and depend upon the business and the executive. Paisley Business School constructed a sample drawn from Britain’s largestcompanies (ranked in terms of turnover), examined annual accounts for 1995/96,and gleaned detailed information on factors such as CEO work histories(including job and company tenure) and remuneration. After excluding companieswhere the information was incomplete, we were able to analyse some 220 of Britain’sindustrial giants. Support for the belief that CEOs and firms often enjoy a long-termemployment relationship became clear when we found that only 21 per cent ofCEOs had company tenure of less than three years. In contrast, some 60 per centof CEOs had been with their current employer for more than six years. Thetypical CEO had worked for the same company for 11.3 years, with thelongest-serving individual boasting 48 years of company service. Among the numerous examples of these highly-durable employment relationshipsis Lord Browne at BP. He joined BP in 1966, became an executive director in1991, and CEO in 1995. His case is the rule rather than the exception. Despite half of the individuals sampled having been a CEO for less thanthree years, we were careful not to jump to the conclusion that tenure as CEOis typically short – the flipside of this is that half of our CEOs had been inthe job for more than three years. One quarter of those studied stayed morethan six years. It is also important to remember many of the CEOs with job tenure of lessthan three years will be offered new deals. The often prolonged nature of CEOtenure was clearly evident in the results of our study. Additionally, we foundthat average CEO remuneration tends to rise with CEO tenure. The empiricalevidence clearly rejects the argument that short-tenure CEOs will earn more asthey have had to be poached from rivals. Rather, high pay levels appear toreflect efforts to retain successful appointments. So is it better in theory to appoint from within or hire from outside whenfilling the post of CEO? Most of our CEOs (59 per cent) had been promotedinternally, and the average basic salary for this group was some £558,339,compared to £475,462 for those recruited externally. In conclusion, much of the public debate on executive remuneration focuseson the need to pay high salaries to attract, motivate and retain the bestexecutives. Yet most of the CEOs in our sample had not been recruited fromother firms but had been promoted internally, often after a long-termemployment relationship. Taking account of the work history of CEOs may help us to better understandtheir current remuneration levels. The common perception that a CEO’s contractis typically a short, but highly-rewarded one, is not borne out by the data.Many top executives enjoy long company tenure, and those who achieve the topjob through internal promotion appear to do particularly well in terms offinancial rewards. James Johnston is a lecturer in economics at Paisley Business School. Tenure,Promotion and Executive Renumeration was published in the May edition ofApplied Economics. A fair day’s pay?On 28 May 2002 in Personnel Todaylast_img read more