Executive pay in the spotlight

The last few months have seen something of a burst of activity in our executive benchmarking. This is normally a reasonably popular time of the year to have a look at what the market is doing, but this year there seems to be some added interest. I am not totally sure why this is happening, although there are some factors that may have driven executive pay up our customers’ agendas.

General pay movement subdued

We have had a fairly unprecedented period of relative pay stability. The recession of 2008 – 2009 was deep and long lasting. Furthermore, it has been a recession that the economy has struggled to recover from. Five years on, we are still grappling with stalled productivity and surplus capacity. Even when there is significant growth, there is likely to be little to show for it as the inherent slack in the economy is taken up.

The gradual nature of the recovery has undoubtedly had a significant impact on pay. We have seen very little deviation from the two to three per cent range for general pay review budgets in the past three years. Prior to that, the general increase level was even smaller. 

Change is in the air

The average earnings data suggests that real increases may be smaller still, although the data may be masking the way in which the shape of the workforce has changed. We now have proportionately more low paid jobs. Our data suggests that the generally subdued picture is not the whole story.

When we look at the line-by-line data we collect for our salary surveys, some individuals are seeing their pay increase at above-inflation rates. Furthermore, there is evidence of increasing differentiation based on a combination of individual performance and the need organisations have to retain the core competencies they will require for the future.  This hasn't yet translated into significantly larger overall pay increase budgets but, with inflation back to target levels, we expect to see real earnigs movement recover a little of the lost ground.  

There are some small signs the recovery is starting to gather pace. Confidence is starting to build.  At some point it is likely the competition for high quality talent will increase and pay will increase with it. 

What’s happening with executive pay in the meantime? 

Is it simply a case of the well-off creaming what little money is available, whilst the majority of people have their pay becalmed? If that were the case, the senior executives and directors would be seeing their market rates surging ahead. Our data doesn’t suggest that is happening. 

The reason for that may not be a simple one. I suggest one new development in particular may be acting as a strong moderating influence on executive pay. Indeed, I suspect this may be the single factor that has had more influence than any other, on executive pay since the recession started.

Has spring arrived?

That factor is the new sense of fairness that comes from unprecedented levels of shareholder and public inspection. The crisis in the financial sector has caused a loss of trust that seems set to reverberate for a long time.  Consequently, any disconnect between organisational performance and executive reward will be subject to greater scrutiny than we have previously seen. 

Organisations and their remuneration committees are increasingly aware they can’t allow executive pay to spiral ever upwards at great pace whilst the rest of us languish with little real earnings growth. They know they will be panned in the media, vilified by employees, shareholders and public alike and, thanks to revised legislation, increasingly called to account and their decisions challenged.

The warmth of the so-called shareholder spring may eventually have arrived. For once, the reality of “sharing the pain” may finally match the rhetoric.