Key things to consider when heading into a pay review
This week saw #FatCatTuesday trend on Twitter, as news spread that by the first Tuesday of 2016, Britain’s top bosses would have made more money than the average worker will earn in an entire year.
The research from the High Pay Centre revealed that the average pay for a FTSE 100 chief executive in 2014 was £4.96 million – equivalent to earning more than £1,200 an hour – while the average UK worker takes home £27,645 per annum. And the increasing difference between top and average pay isn’t going unnoticed. According to a CIPD survey published at the end of 2015, 71 per cent of employees agree that CEO pay is far too high.
Examples of extravagant pay were historically rife in the banking sector, which came under fire for awarding seven or eight figure salaries to senior leaders in the wake of the 2008 financial crisis. Yet it was in fact a culture of excessive risk-taking, driven by systematic behaviours rather than high levels of pay and bonuses, which led to the 2008 financial crisis, according to a report from the Financial Services Authority (FSA) in 2009.
This makes the news that the successor to the FSA, the Financial Conduct Authority (FCA), has decided to scrap the planned review into banking culture even more baffling to outsiders.
Dr Almuth McDowall, organisational psychologist at Birbeck University, said: “CEO pay is at crisis point. We can’t retain the status quo if we want to create corporate cultures and structures which are based on trust, fairness and sustainable business performance.”
Here are four things to consider when determining the impact pay could be having on your organisational culture:
The emotional link
“Pay represents many things for us, including power and status,” said McDowall. But employers have to consider justice and equity when calculating pay, and handing out reward, rather than ‘hurting people’s feelings’, she adds.
And citing the CIPD’s research, which found that 59 per cent of employees are demotivated at work because of high level CEO pay, Stefan Stern, director of the High Pay Centre, said: “Excessive pay is disruptive and reduces morale.”
Ben Wilmott, head of policy at the CIPD, added: “Pay is one of those key factors that if it is not fair, then it will fundamentally affect people’s perception of their job and influence the extent to which they want to produce great work.”
Not just in it for the money
McDowall said that pay should always have some relationship to performance, so that “inputs have a fair ratio to output”.
While Stern said that leaders’ interests should be better aligned to the business. “A very big question for leaders themselves is: ‘What are they really in it for?’ If your pay is so different from anybody else’s, is your motivation the same? Especially if the so-called incentives are linked to very short-term targets and indicators such as share price,” he said.
And McDowall added: “Behavioural science has copious evidence to show that simply paying people more does not make them perform any better.
“Good HR practice has to encompass fair and evidence-based reward strategies, which goes beyond financial rewards to take into account the non-financial aspects of work.”
Fairness vs transparency
“If you are trying to create a positive working culture of trust and fairness, there needs to be transparency and clarity over why and what people are being rewarded for,” Wilmott explained.
McDowall said reward policies can go unchallenged for years, which helps to foster a culture of mistrust. She advocated greater transparency, adding: “If reward practice was truly fair, there would be nothing to hide.”
But Stern urged caution, commenting: “There are consequences to transparency. Some people argue that the problem with top pay has got worse because everyone could see what others were getting and people start competing.”
That is when the narrative around pay and its relationship with an organisation’s values is just as important to explaining the figures, said Willmott.
Appetite for change
At the moment, there is a real anxiety about doing things differently, and no one wants to make the first step, McDowall explained. But she added: “At the same time, we need policies which mandate organisations to publish their reward data, but also non-financial performance metrics.
“Our research shows that people have a real appetite for change - they want more thoughtful, compassionate and shared leadership in place,” she said.
“The finance sector is an example for where we really need to see this happen.”
The CIPD has called on the government to introduce voluntary human capital reporting standards on a number of key metrics, which would go some way to establishing the real impact pay is having on organisational culture.