THE VIEW
The View
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Average pay, CEO perks and bonuses – today’s hornets’ nest

PUBLISHED : Wednesday, 09 September, 2015, 10:56am
UPDATED : Wednesday, 09 September, 2015, 10:56am

How much are you being paid? I presume most readers would prefer not to answer but in any given organization there is intense curiosity over how much colleagues receive and there is often a sense of grievance that emanates not so much from the pay level per se but from comparative pay levels between colleagues.

In my experience people are willing to accept pay levels that are well below their expectation if they sense that they are paid at roughly the same rate as colleagues doing similar jobs. Discontent mounts when it is discovered that some employees are paid more for doing the same job.

However pay is also very much seen as a measure of a person’s worth – this may be nonsense but it is definitely the case. Thus every organization contains employees who believe they are worth more than others and they get most agitated when they discover that they receive the same remuneration as those they consider to be less worthy.

Pay, in other words, is an employment nightmare and the nightmare deepens when supposedly confidential pay rates of other employees becomes known, something that often happens, producing consequences we are all familiar with.

In companies that pay performance or goal-related bonuses, the relative levels of these bonuses are a subject of intense interest and, in many cases, provoke outbursts of serious discontent for the losers and triumphal behaviour by the winners. In the finance sector where bonuses often exceed basic pay levels there is no shortage of loud mouths keen to broadcast how much they have been given and when they do so all hell lets loose.

It is argued that there is some science to pay levels, indeed what are now called human resource managers (an insulting term if ever there was one) go on courses designed to teach this science. The reality however is that pay levels are established by a variety of methods, which obviously include consideration of the value of an employee’s contribution but must also take account of affordability, from the company’s point of view, and then there are a whole of host of other factors that may include a person’s likability, their relationship with other employees and, of course, prevailing pay trends in the market.

There is also a wider debate here and it is less personal but nevertheless rather pressing. This concerns the growing gap between top executive pay and that of the average employee. In the United States the average company chief executive earned something like 20 times more than the average worker back in 1965. By 2013 the average chief executive was taking home 295.9 times the pay of the average employee.

Can it therefore be said that in the intervening four decades chief executives were able to provide something like 200 times greater value to their companies? This seems highly unlikely and is causing discontent both among employees and the shareholders of listed companies.

This explains a recent decision by the US Securities and Exchange Commission requiring public companies to disclose the ratio between CEO’s pay and that of median employees.

Unsurprisingly company bosses in America are very unhappy about this arguing, among things, that this is a crude measure for comparison purposes and that it takes no account of the amount risk bourne by corporate leaders.

However shareholders will also have noted that in the period between 1978 and 2013 average CEO pay rose at double the rate of US shareholder stock market returns.

The suspicion therefore lingers that the rapid rise in executive pay is not the product of greater profitability or even better performance but simply a reflection of the ability of companies to satisfy the greed of their executives.

This has contributed to both increased shareholder activism and, on the other side, the large anti-capitalist protests seen in Europe and America.

Life is not fair so it will always be the case that some people are paid far more than others in circumstances where it is hard to determine whether their contribution is really worth this extra sum. However things do seem to be getting out of hand.

Don’t hold you breath for an outbreak of pay transparency in Hong Kong because most local listed companies are still directly run by their majority shareholders and they choose to take remuneration not in the form of taxable salaries but by way of non-taxed dividends. In some ways this is fairer to shareholders but it leaves employees festering.

There will never be an absolutely ‘fair’ determination of pay levels but in my experience better run companies make a real effort to ensure equal rewards for equal effort and they do not work on the basis of the enormous pay disparities.

 

Stephen Vines runs companies in the food sector and moonlights as a journalist and a broadcaster