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Truth or Dare: Top 5 Exec Pay Myths

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Posted by Deborah Rees-Frost on 05 December 2017

Truth or Dare: Top 5 Exec Pay Myths

Corporate Governance | Financial Reporting Council | HR Reward | Pay Transparency | Remcom | Reward Consultancy | Bonus | Performance Related Pay | Motivation |

Executive pay is hardly ever out of the headlines, but over the last few weeks it’s seemed that hardly a day goes by without another story in the spotlight.

Whether it’s the extreme gender pay gap at executive level, or Bath University’s vice-chancellor resigning over pay, or proposed changes to the UK Corporate Governance Code, the result is the same: everyone has an opinion.

It’s not an impartial debate, either. At a time of economic uncertainty, pay squeeze and rising living costs, hearing about the enormous pay packages of some executives generates a lot of public anger. The emotive nature of exec pay makes it hard to discuss openly, and there’s a lot of misinformation out there.

With that in mind, here’s the reality behind some of the most common exec pay ‘truths’:

1. ‘Greedy executives always want more money’

Weirdly they don’t.  They value pay relativity more highly.  PWC asked executives if they would rather take a job on more money: – £180,000, and be the lowest paid member of the team, or less money:-  £165,000, and be paid the highest in the team.  A majority voted for less money but being relatively higher paid than their peers.

2. ‘Executives are entrepreneurs and should be rewarded as such…’

Executives make a trade – their experience, knowledge, networks and time in return for money.  As a group, they tend not to put their own money at risk. Instead, their risk is framed in terms of career choice and reputation. They can always walk away without the bank repossessing their house.

Entrepreneurs dance to the beat of a different drum. For them, the greater risk is missing out on opportunity, and they always want to feel in control of their own destiny.

A word of advice for those who work in an entrepreneur owned business - entrepreneurs find it hard to understand the preoccupations of the executive, and often want to reward the individual in a high-risk, high reward package because that’s what would motivate them. It can be helpful for the HR director and non-exec directors to remind the entrepreneur/owner of the difference in world-view.

3. ‘Share-plans align executives and shareholders’

I’m afraid not. Executives primarily see shares as a mechanism for paying them more money – often in an attractively tax-free wrapped vehicle. They tend to sell the shares as soon as they can. The long-term element of pay can be expensive – often employees will discount the value of long-term pay by as much as 50%, which makes it a costly investment for the business.

4. ‘You have to pay upper quartile pay to get upper quartile performance’

It’s not always about money. There is lots of evidence that employees will take a job they really want, and feel is aligned to their values for a lower package.  The arts, sport and the charitable sector rely on the ‘other’ elements of the employee deal to create a buzz and pay employees less compared to the market. How can you create an inspirational and compelling story around your business to make people want to work for you?

5. ‘You should always pay ‘the going rate’’

It’s true that pay benchmarking is a really useful backdrop, and should influence your decision-making, but in the final reckoning, the Remuneration Committee and CEO must make the decision about how much to pay the executive in question.  Maybe less, maybe more, but don’t be lazy and just go for the median; unless there’s a good, thought-out reason for that choice.

 For help with executive compensation, or any other aspect of pay and reward, call Innecto on 020 3457 0894.

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