Simon Caulkin
It’s as regular as the changing of the seasons. Every few months, a new survey triggers the familiar debate about soaring executive pay. But managers take no notice of the haranguings of unions and ministers, and the frustrated disapproval of everyone else; they just keep pocketing the cash.
It is disingenuous to blame the escalation on the impersonal operation of a “market”: this is about human beings with wills. Nor is greed an adequate explanation, though it is part of the picture – as is the fact that the beneficiaries are effectively in a position to pay themselves whatever they want. Neither market nor greed gets under the skin of the situation.
Some American chief executives (median pay last year was $3,09-million, according to a new survey) would be hard put to spend what they earn, even working at it full time. Some packages include financial counselling – to tell them how to cope with all that cash.
At the same time, all the research says that once reasonable pay expectations are met, the job itself, not the money, is the most important reward. So why do a minority demand – and contort themselves into extraordinary postures to justify – pay levels which neither common sense nor utility can validate? One explanation is that this kind of pay is not rational, but a throwback to primal human make-up.
At London Business School, Professor Nigel Nicholson, a specialist in evolutionary psychology, believes that beyond a certain point pay is not about money, but display. “Powerful people will always find ways of displaying power and status,” he says. “High pay and piles of stock options are a mark of their worth.”
Primitive as such behaviour is, in business it has to be given a veneer of rationality. This is accomplished through a process akin to money-laundering. As it passes through different stages, the base impulse is clothed in layers of artfulness which conceal its origins in sophistry and bad faith.
British psychologist Donald McLeod notes that most people have a well-developed sense of what “fair pay” is. But whereas undervaluation is a real demotivator, people who find themselves overvalued treat it as a stroke of good luck.
That understandable reaction does not prevent the beneficiaries from applying relative “fair pay” comparisons to their good fortune, however. Those who earn exorbitant salaries may know in their hearts their salary and bonus are out of line with other sectors – but they are still deeply aggrieved if a colleague’s bonus is bigger than theirs.
More subtly, McLeod hypothesises that exorbitant salaries may have sent the whole performance-pay dynamic into reverse. Instead of top executives working harder to get more pay, they get more pay and then have to justify it by working harder. “I sense a huge pressure to show the results that would justify the levels of pay they’re getting,” says McLeod.
There are two further elements in this self- serving broth. One is “fundamental attribution error” – the human tendency to ascribe success to one’s own actions and failure to everyone else. In reality, it is usually impossible to establish direct cause and effect in business success because there are so many variables. Many factors are involved, and luck almost always plays a large (and unacknowledged) part.
If top managers are happy to take to themselves the larger-than-life responsibility for the corporate destiny, they are greatly assisted by the business press. Mathew Hayward, another London Business School academic, suggests media acclaim for CEOs plays an important role in “personalising” companies.
By identifying companies with dominant leaders, the press makes them easier for investors and customers to “read”. It also creates a comforting illusion of control.
CEOs find press adulation a drug. Apart from the personal gratification, media acclaim opens new possibilities for deals.
But as with other performance-enhancing potions, taking the “manager as hero” drug is a Faustian bargain. One dismaying side- effect is hubris. Managers can come to believe their own press, oversimplify situations and overestimate their abilities to control them.
A classic example, says Hayward, may be Cendant in the United States, whose CEO, Henry Silverman, was a year ago described by Fortune as “a genius”. Fortified by this endorsement, he went on a huge spending spree, engendering equally exaggerated expectations – and stock-option “incentives” for Silverman worth $700-million. These expectations could not be met by ordinary means: the company is now under investigation for accounting irregularities.
“When you’re riding the crest of a media- assisted wave, you can say to shareholders: “Look how much I’m making for you – how can you be small-minded about options?'” says Hayward.
Heady though the combination of instinct and glory is, something is still missing for the pay escalation: the remuneration consultants, firms which make a living by advising companies what their top managers should be paid.
Hayward counselled caution on the use of remuneration consultants’ surveys in setting board pay because of the danger of the process becoming a never-ending cycle of catch-up.
Nonetheless, a new piece of research on pay and corporate governance reveals that 75% of British public companies use compensation consultants in setting directors’ pay.
Compensation consultants, appointed and paid by the managers on whose pay they advise, are the finishing stage in the great corporate pay whitewash, completing the process of turning a virility symbol into tables and figures which show that all those noughts are the most logical thing in the world.
It’s a miracle of modern pseudo-science – not to mention a telling reminder of how close rational management is to the irrational urges it is supposed to control.