03.02.16
Pay gap between CEOs and the workforce demotivates employees
Source: PSE Feb/Mar 16
Charles Cotton, performance and reward adviser at the Chartered Institute of Personnel and Development (CIPD), the professional body for HR and people development, looks into the thorny issue of chief executive pay and the impact it has on the workforce.
The growth in UK chief executive pay does not clearly correlate to personal performance or business outcomes and is having a significant impact on the motivation levels of the wider workforce, new research from the CIPD has found.
While the focus of the research is on large companies, some of the findings and recommendations are applicable to the public sector.
Greater pay transparency
The research includes a survey of employee attitudes on CEO pay, based on the views of over 1,000 workers across the sectors. It reveals some interesting differences in the perceptions of private and public sector employees. For instance, it highlights that most public sector workers (62%) believe their chief executive’s current level of pay is too high, compared to just two-fifths (39%) of private sector workers who feel the same.
In addition, over half (56%) of those working in the public sector do not think that their CEO is rewarded in line with the level of their organisation’s performance, while in the private sector just one third (33%) think similarly. Perhaps unsurprisingly, both the majority of public sector (82%) and private sector (69%) workers wish to see more pay transparency within the organisation.
When asked how much their CEO should be paid, given their role and responsibilities, just over half (53%) of public sector workers think that it should be capped at 10 times that of the average employee. However, less than two-fifths (37%) of private sector workers think the same.
However, not only can individual CEO pay have a negative impact, the pay of chief executives collectively may also have harmful consequences. Overall, 71% of employees we questioned believe CEO pay in the UK is ‘too high’ or ‘far too high’, and 59% of employees say the high level of CEO pay across the country demotivates them at work. If one looks at responses from public sector employees we find that a higher proportion (77%) believe CEO pay is ‘too high’ or ‘far too high’ and that the high level of CEO pay demotivates them (69%).
Sense of unfairness
The disparity between pay at the high and lower ends of the pay scale for today’s workforce is leading to a real sense of unfairness that is impacting on employees’ motivation at work. The message from workers to CEOs is clear: “The more you take, the less we’ll give.” This appears to be even more the case in the public sector.
The CIPD suggests that chief executive reward packages in the private sector should become simpler and more clearly aligned to both financial and non-financial performance measures. These should include how their leadership impacts on critical outcomes such as employee wellbeing and engagement, accountability for culture and behaviour, and workforce development, all of which are vital underpinnings of the long-term health of both people and businesses.
While public sector CEO pay arrangements are less generous and complex than those that exist in the private sector, there are lessons for both in our second report, ‘The power and pitfalls of executive reward: A behavioural perspective’, which explores some of the factors that have contributed to high chief executive remuneration.
Some of the recommendations from the report authors – a team consisting of Birkbeck University, management consultants Lane4 and reward consultancy PayData – are listed below:
- Continuously improve CEO selection and performance management practice: All employers should review how they recruit and select their leaders to ensure that they use valid selection criteria, including bespoke psychological profiling, to ensure that leaders have the right values, skills, drivers and behaviours, including a balanced leadership style. While employers should profile the leaders they want now, they should also think beyond the present to where the industry and the organisation needs to be in the future.
- Build coaching cultures: Organisations should help coach their CEOs to develop their own coaching skills and have them coach or mentor others to ensure that learning, innovation and mutual respect permeate practice and encourage a more transformational and distributed leadership.
- Redesign top team jobs: Evidence indicates that leadership behaviours can weaken over time and that too much emphasis and pressure is being placed on individual CEOs. Instead, organisations should ensure a job design where both intrinsic and extrinsic aspects of work feature highly, as in an ethical approach, and that leadership and accountability are shared. This should result in a more equal distribution of responsibilities and rewards in top teams.
Our study suggests that employers review the size and makeup of rewards. For chief executive pay packages to be perceived as equitable by all parties, they should be proportional to the CEO’s contribution – simple to understand and implement. Base salaries should be in line with the median salary of employees and set at a level that is socially acceptable. The deal should recognise that immediate rewards are more motivating than those that are delayed over time.
To address the risk that variable pay could result in unintended consequences (such as inappropriate behaviour), it should play a limited role, be linked to transparent and simple performance measures that recognise the needs of the various stakeholders, and only be paid out for extraordinary performance.
Future leader review
Finally, we recommend that employers should make perceptions on rewards within the organisation and beyond explicit. A good place to start would be gap analysis between the current situation and the future. The data from such an analysis will assist organisations to identify priorities that will provide the evidence to underpin CEO reward decisions.
In summary, CEO reward packages are not only demotivating the rest of the workforce, they may be failing to motivate chief executives themselves. Looking forward, employers in all sectors need to review the type of leader they need in the future and the implications for the design, content and responsibility of the chief executive’s role. Rewards should emphasise both the financial and non-financial, and any performance element should use simple, relevant and transparent measures and be linked to exceptional achievement. While large rewards can result in employee envy, the levels of envy can be reduced if employees perceive that these rewards are justified.
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