Thursday 12 January 2012

Should we curb excessive pay?

Remuneration is often a hot topic particularly in a time of economic hardships and tight budgetary controls.  Having gained a detailed insight into the area as we are often aware of people’s salaries and bonuses and what the market pays. Although highly confidential, individuals were always happy to let us know. This is why Time MCG has developed an interest in the topic and can offer advice to firms as part of its services.

It is important primarily that we define remuneration which depends on so many different factors and here is an attempt at a summary. When we look at executives in the banks or large corporations they are generally broken down as follows: Fixed annual salary. Your bonus potential. Share options, pension and health insurance. Potential extra perks such as children’s schooling, phones paid for, laptop, car etc. A reduced mortgage rate if you are working for a bank is a good one. Often at high level employees negotiate a sign on bonus and in some cases at Board level, a clause specifying a payoff package if they were asked to resign. A sign on bonus is negotiated simply because of what the person is negating from his former position. Companies will have strong guidelines on how their offers are made. Share options can often offer a lot of misunderstanding. Companies can award shares at the price of its value of the time that they are awarded to you. Typically you are allowed or have the option to sell them at given dates and price in the future. (e.g. after 3 years a portion, 6 years another portion etc) This is a way of retaining an executive. If you were to leave before you were able to exercise your options, they would become worthless.

Generally speaking if you are looking for more perks, it is possible but it will be offset elsewhere. There is always a limit. What defines your fixed salary is a mixture of company guidelines, market conditions, years of experience and position. Often companies get this right helped by internal expertise, collective labour agreements with other firms in similar sectors and advised by specialised consultancy firms. Bonus’ are part of your secondary benefits. Your bonuses are generally calculated according to the company’s profit and your own performance. Some firms can get very creative how they award their bonuses. E.g. percentage of fees earned or turnover made minus your cost centre etc. At the end of the day it is about profit of the firm. It would be very difficult to argue for example, that an individual had done well in a bank as a front office fee earner for example, but overall the firm made a loss or that you would get a bonus whilst the firm was concentrating on cost cutting. Although firms are quite creative nowadays with their company structures and you could still get paid if for example you were responsible for your own profit centre. The arguments that are in favour of good bonuses. It is an incentive for hard work, it enthuses success. It attracts the best. People in the private sector have money to spend who in turn put it back into the economy in other forms.

We knew often whether people were paid above or below market value and would say ‘You have just got one problem, you are too expensive!’  Individuals never quite liked to hear that it would take them time for this to sink in if they were seeking new position. Pay can be markedly different amongst commercially & specialized orientated roles, according to each sector whether you work for banks, manufacturing, FMCG, retail, IT, or professional services. Amongst functional roles such as HR Director, Finance Director, or IT Director, these were pretty similar across the sectors. It was only in rare cases that pay was excessive and unusually high.

Where the criticism often comes into play is the bonus excesses in the financial sector amongst certain commercial, front office or fee earning individuals in the financial districts of London and New York. Here they are often discretionary. Not to mention sometimes at Board level for large corporations and in certain cases professional services, a more secretive sector, (lawyers, consultants, advisors etc..) Professional services charge (often by the hour) and in certain cases there are cases where fees seem hard to justify. More often than not they can be based on the reputation of a firm and not the individual or some emotional perhaps delusional aspect in saying that ‘we have to charge high as we are good and one of the best.’ It has a tendency of the rich becoming intertwined with the rich. There are many of these individuals who walk home with 7 figure plus annual compensation.

Amongst bankers it is more complex. Generally speaking the Anglo Saxon model is the lower the fixed salary the higher the bonuses. The more traditional continental European model is a higher fixed and lower bonus. In Holland for example, a couple of years back the government decided to cap bank bonuses. This was in order to pre-empt any form of backlash from the general public after the financial crisis and the ABN Amro debacle. The bankers were not too concerned as they were not that high in any case and already they were fairly content with their quality of life.

In conclusion in cases remuneration is correct and spot on although firms need to continually stay abreast. However we are living in a time of serious constraint where many parts of the world and our society are suffering due to inequalities. The wealth gap between the top and the bottom is getting wider. Job losses are increasingly common as are more positions becoming obsolete. There is a real possibility of much resentment and even unrest. We must act responsibly, possess a social conscience and therefore be sensitive to our own pay. It needs to be justified and in some cases transparent as must the profit of the company as the two are clearly linked. Remuneration will need to be more aligned in a case of cost cutting and job losses. No one wants to see bosses lining their pockets as a result of other people’s successes or ostentatious behaviour with regard to wealth. No one wants to see cleverly made large profits as a result of other peoples misfortune (as per the banks with real estate crisis in 2006) or from misguided products. A large pay off of a CEO due to resignation for poor management is wrong. Speculative greed and short termism is not cool. People might say ‘it is survival of the fittest’ I see it as something a little more than that. It just looks like material wealth, money and profit becomes our goal and our only goal which is proven, as in the last ‘lost’ decade and historically, to be superficial and only exasperates our inner craving for more whereby negating our deeper sense of fulfillment and purpose. We will only end up with more problems at a wider level as we are witnessing now.

In an ideal world what we would rather see is a good product or a good service adaptable and changeable to new innovations for the long term, driven and managed by talented inspirational individuals and backed by a strong motivated workforce whereby rewarding ourselves responsibly, fairly and justifiably.

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