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ChangingMinds Blog! > Blog Archive > 12-Nov-05


Saturday 12-Nov-05

Fair pay, fair play

On the radio yesterday was a report that executive pay has again gone up over the past year well ahead of inflation. More UK executives than ever are getting million-pound payouts, sometimes on the back of share-price hikes and generous share options and sometimes largely driven by a base salary that seems to be on a never-ending upwards curve.

Although I'm sure the executives are happy with their pay, and maybe the taxman is also happy with the slice he gets, what is the impact on those they employ? Whilst the executives may feel that the business gains they achieved are worth the fat bonuses that multiplied their pay, will the people lower down the pecking order be happy for their bosses to get this amount of money. Experience would say that this would be a very demotivating thing, especially if the increase in profits was gained through cutbacks and salary freezes at the coal-face where the real value is being created.

In a conversation with a friend who's doing an MBA at the illustrious London Business School, the topic of fair pay came up, and we discussed the work of Elliot Jaques, a management researcher. Jaques did some interesting work about fair pay. Fair, of course, is a perception, which will vary depending on the audience. Fairness and fair play is also a need, which can have a powerful motivational effect on us.

Jaques' insight, borne out by his research, is that the time horizon that a manager works to correlates fairly well with what is largely considered to be 'fair pay'. Thus if I work on a production line, doing as I am told from hour to hour, my time horizon, at least in my work, is pretty immediate. My supervisor may look out to the end of the week, whilst the department manager might have production targets that reach across a number of months. By the time you get to the person at the top, the strategic horizon may be several years.

Decision time horizon relates closely to risk. The further out you look, the greater risk that you are taking and hence the greater talent and skill you need to achieve your goals. Pay thus relates to risk and skill.

The more personal risk you are taking, the more you get paid. Taking risks leads to possible decision failure, which leads to career failure. And indeed CEO turnover is increasing. Recent research shows that CEO turnover is down to very few years whilst shareholder expectations continue to rise.

The more skill you have, the more you get paid. It takes skill to take successful risks. Skill comes from talent, which by definition has a scarcity value, and hard work, which requires potentially significant personal investment. And in a dynamic and highly competitive global economy, it does take hard work and skill to successfully run a company.

Classic economics says that the market will find its level, and that if bosses pay themselves too much, that all effects of this will eventually rebound, positive or negative, on the company. So if executive pay reduces motivation of the workforce, then perhaps this will tip the balance to failure. If high pay causes the executives to relax rather than focus further, then again failure will eventually ensue.

The world is not fair. Those of us who are living in developed economies, even those of us who live relatively simply, have a far, far better life than many people in other countries, where lifespans are still much shorter and the biggest question is where the next meal will come from. This does not excuse unfair pay, but maybe it does give some perspective. When we focus on what is unfair about what others get, we can forget about what is unfair about what we get.

Whilst I deplore unfairness, wherever it is, I am grateful for today and what I have. And whilst I know that some people will use the knowledge on this site to increase unfairness, I hope that making the all content free will also help to redress the balance, perhaps more so. I believe that people are fundamentally good. We are a social species and live and die together.

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