A changed public perception of executive reward has forced a new approach to pay strategy, says Shaun Tyson
One of the paradoxes of the recession is that demand for top, talented managers has continued undiminished in the private sector. In 2011, the economic climate is likely to be even harsher, but in spite of the pressures on employers, senior management pay has risen substantially in the private sector. FTSE 100 directors' total pay rose by 55% from 2009-2010, although most of the increases were in bonus and stock payouts. However, employees generally saw increases of only 2% to 3% over the year, according to Incomes Data Services' Directors' pay report 2010.
So what stance should employers take on executive pay? As well as economic pressures, there is a changed public perception of what rewards are legitimate. The government's Big Society idea points towards a society that sees the rewards of senior managers and directors as indicators of their societal sensibilities at a time of austerity. Reward systems are under scrutiny when there is a perceived imbalance between performance and reward.
State support for banks during the banking crisis explains, in part, why the large bonuses paid to bankers are seen as illegitimate, while similar amounts paid to footballers, movie stars and pop stars are regarded as acceptable. The government has sought to curb bankers' bonuses by extra taxes and special levies, and there are now requirements to pay such bonuses mostly in shares and to defer payment for several years. The Treasury is closing tax loopholes, for example through the impending legislation on disguised remuneration, aimed at preventing employee benefits trusts (EBTs) and employer-financed retirement benefit schemes (Efurbs) being used to avoid tax on bonuses.
During the recession, many organisations froze base pay. For reward specialists and remuneration committees, managing the transition in and out of a pay freeze is like musical chairs - when the music stopped, planned increases ceased and some managers were locked into uncompetitive rewards. It is likely variable pay was used to get round pay freezes. If so, one challenge is how to reduce bonus expectations for the next round and to redress the position on base pay.
Compa-ratios often reveal when individuals are out of touch with a marketplace where, in view of talent shortages, not every employer has a policy of zero increases. Significant base pay rises, through 'green circling' or some form of market supplement might be justified, but have an accelerator effect on the bonuses and benefits attached to base pay rates, causing problems with internal relativities.
The move towards deferred bonus schemes was noticeable before the recession, including long-term incentive plans (Ltips), according to Incomes Data Services' reports 2007 Management bonus schemes and Managers benchmark pay report 2007/08. When the stock market was bearish, the tendency was to pay cash. Now share prices are improving, one would expect shares to be favoured. Deferred bonuses with strategic objectives and clear measures offer face validity in corporate governance terms, with a focus on strategy. Share schemes bring shareholders' and senior managers' interests into alignment.
The wider concept of total reward, where benefits, work style and lifestyle are taken into account alongside financial compensation, will help organisations with a long-term plan for rewards. For senior managers, reward planning is essential. For example, changes to pensions tax relief for higher earners permit a rollover for up to three years in annual allowance, including the employer's contribution.
The challenges for reward specialists and remuneration committees now are how to respond to economic and social pressures while aligning rewards to business objectives and remaining competitive for top managers.
Shaun Tyson is emeritus professor of human resource management at Cranfield School of Management
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References
Directors’ pay report 2010, Incomes Data Services (October 2010)
Management bonus schemes, research file 75, Incomes Data Services.
Managers benchmark pay report 2007/08, research file 77, Incomes Data Services.
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