Soaring CEO pay ‘highlights need for fundamental changes’

Nick Elvin

The increasing gap between chief executive pay and that of the average employee risks undermining the morale and motivation of the workforce. That is one of the findings of research sponsored by the Chartered Institute of Personnel Development and presented at the British Psychological Society’s Division of Occupational Psychology annual conference.

The results showed the gap between CEO pay and that of employees continues to widen. The average CEO pay of Britain’s blue chip companies in the FTSE 100 Index is now 187 times higher than that of the average UK full time employee; compared to 47 times higher than average pay in 2001.

Stakeholders in organisations affected by the issue have different perspectives. Replying to an in depth survey, over half of very senior decision makers, believe that CEOs’ pay is justified by the need for profit. Others believe that it is more important to consider the long term needs of the business, and also to consider the behaviour of the CEOs themselves.

Scrutiny of existing research revealed that organisations need to pay more attention to who is selected to the top. Individuals with more narcissistic tendencies are most likely to emerge as leaders and are also more adept at negotiating themselves higher rewards – with the most powerful even ‘rigging’ their company’s performance outcome measures to present them in the best possible light and thus demand even higher rewards for themselves.

The research also found there should be less focus on disproportionately rewarding the performance of key individuals given that where CEOs promote shared or distributed leadership there is likely to be better team performance.

Dr Almuth McDowall, from Birkbeck University of London, which carried out the research, said: “Our work suggests that CEO pay is at crisis point. We can’t retain the status quo if we want to create corporate cultures and structures which are based on trust, fairness and sustainable business performance.

“Too often high levels of CEO pay are explained by the power and personality of the individual CEO, the make-up of the remuneration committee and the need to compare favourably to existing market rates rather than clear measures of individual and organisational performance.

“Fundamentally, significant changes need to be made to CEO rewards, which need to be smaller, have a more transparent structure and linked to transparent reporting of financial and non-financial metrics for success.”