I am not opposed to the healthy remuneration of executives for success – quite the opposite – however it has become clear that Corporate Britain has been captured by ridiculous levels of pay for executives who fail to deliver business success.
As the owner of Phones4U, I deliberately created a system that motivated workers financially, whereby senior managers would be significantly rewarded for long-term performance at a high level. The skill of leading executives is priceless for a business; they have the ability to take a firm to the next level and significantly boost shareholder value – the most crucial factor when considering remuneration.
What can be even worse from a business development perspective is the cost of attrition, losing highly talented people who are relied on most. They must be retained, even if their salaries seem inflated. But what we are regularly seeing is executives who consistently fail to deliver long-term financial success for their companies being rewarded with exponential salaries and dishonest bonus packages.
This has triggered significant attention and debate over the past twelve months, as wages fail to keep a pace with inflation, and more stories of excessive executive pay are reported. These have included the BHS fat cats who benefited most from the bailout package agreed following the company’s collapse, and UK university chiefs taking home up to £468,000.
Whether successful executives are worth what they are being paid is often ignored; the assumption is that they are overpaid and could not possibly be delivering value which is consistent with their sizeable salaries. From the perspective of a business owner, this is often misguided and oversimplified. Shareholder value is the greatest determining factor when considering an executive’s pay; they can make or break your business. If they are adding significant value and are acting responsibly to improve a company’s reputation, then quite simply they deserve their pay, and bonus.
Two examples of the importance of executives stand out; Apple lost 3% of its value when its CEO Steve Jobs died, knocking around $10bn (£6.1bn) off the company’s value, while Microsoft gained 8% when Steve Ballmer resigned. Executives like Steve Jobs are paid so handsomely because the decisions they make are vital for the success of the business, and if you want to attract the very best to your firm, you have to pay them accordingly.
However, the long-term approach to financial incentives and salaries that I adopted at Phones4U is not often employed by other businesses and is replaced by an insatiable drive for short term profitability, and, worst of all, a system based on overall business turnover calculated on an annual basis. Shareholder value is ignored by many. Executives are often not aligned with the long-term success of their company, and are instead incentivised to make business decisions which could be damaging in the long-run.
This is a difficult subject for companies looking to future-proof their business. Executives with a short-term outlook are without an incentive to protect the reputation of their company. A business’ reputation takes years, if not decades, to build, yet can be destroyed in a heartbeat by a reckless commercial decision. A damaged reputation will always impact share price – reinforcing the need for executive pay and performance to be closely aligned with a company’s long-term shareholder value.
An issue often ignored in this debate is executive severance packages. This is fat cat pay at its most preposterous. Despite apparent failures, executives receive multi-million-pound pay-offs. A business often feels it has no choice but to do so, as they are left powerless in fear of former executives dirtying the name of their company.
Worse still, these same executives who consistently fail in their roles go from job to job, collecting compensation packages at every turn. These executives are legally protected, and are simply not held accountable under the current system for their poor performance.
Corporate Britain is undoubtedly in a perilous position. Inflated salaries and bonus pay-outs are unaligned to shareholder value. Power has shifted to executives, who are able to perform poorly and negotiate their own severance package from a position of unfettered power. This leaves less senior employees alienated by the financial security they see in their executives, and the apparent injustice of such an unmeritocratic system.
If the government is serious about tackling excessive pay, more needs to be done to empower company shareholders, realigning remuneration with long-term performance. Employment law needs to be less protective of the senior executives, and financial incentives must be restructured to align with long term objectives. Without comprehensive reform, the fat cats will only get fatter.