Should We Cap Executive Salaries? Pay in the Age of the Social Business
Social business isn’t just about creating more ethical products. It isn’t about small tweaks that make a business less ugly. It’s about addressing the fundamentals of society and of a business within society. And nothing is more fundamental to business than pay. After all, nobody would go to the office without it.
So what are the problems with the current approach to pay? And what might we change to make pay work better for society?
Letting Go of Entitlement
There’s a reason why we’ve heard so much talk about entitlement in recent social debates. Arguments ranging from political engagement to the plots of computer games often boil down to attempts by one side to create greater equality, while the other side defends the status quo, feeling they are entitled to what they have simply because that’s how things have been.
Like the angry voices of “Gamergate,” many in business feel entitled to ever-rising pay. In this view, doing well entitles us to ever higher wages. Our pay should never drop unless we make a cataclysmic error. And it indulges those at the top to massive sums, with CEO’s receiving 300 times as much as average workers.
But this approach to pay is not set in stone. As recently as the 1970s, the pay ratio between CEOs and average workers was only twenty-five to one. Ever-rising wages are connected to the dangers of inflation.
If we let go of our entitled assumptions, what models could we adopt instead?
Leaving Behind Performance-related Pay
One model we certainly shouldn’t expand is performance-related pay. The example of high-powered sales forces, and the obvious appeal of a chance for more money, have led to performance-related pay increasing dominance of leadership compensation.
But a large number of psychological studies have shown that performance-related pay is not only less effective than its advocates believe – it can actually be harmful. In a similar way to having an audience, performance-related pay adds psychological pressure. This can increase productivity in jobs that require little mental engagement. When complex thinking is required, however, it gets in the way, leading to worse performance when high pay is at stake. Competition for these rewards crowds out beneficial cooperation, and the mechanisms of performance-related pay create complications, frustrations and extra work.
In short, the high flyers of the 1980s were wrong – greed isn’t good, and tapping into it is harmful.
Making Pay Levels Relative
Letting go of performance-related pay and entitlement to endless growth creates new possibilities. If we want to be socially responsible then we should build pay around the whole social unit of a business, not just its individual parts.
The Israeli government may have the solution.
A recent law passed 56-0 in the Israeli parliament has capped the salary of top banking and insurance executives. But this is not a simple maximum payment – it is tied to the salaries of employees, with leaders in these businesses unable to earn more than 44 times the salary of their lowest paid employees.
Think for a minute about what that means. If pay is a ratio then executives at the top have an interest in improving pay for everyone in the company, not just themselves. The interests of those at the top of this part of society are now tied to those at the bottom. There will doubtless be loopholes, and for such a measure to be truly effective it needs to cover contractors as well as employees. But as a way to make those at the top of a business help those at the bottom, it’s a powerful measure.
The implication for creating a real living wage is obvious. To be meaningful and resistant to inflation, that wage has to be connected to the highest wages in society. Wealth, after all, is a relative rather than an absolute measure.
And for those of us running socially responsible businesses, the time is ripe to consider applying similar measures to ourselves. 44 times as much income as the lowest paid employee is still a staggering gap, though less than in the largest US businesses. Consider what ratio you think is reasonable, and apply it within your own organization. Give everyone an interest in raising everyone else’s income.
Letting Pay Drop
Another recent example of how we can change attitudes toward pay comes from Richard Pennycook, the head of the UK’s Co-op Group. This Co-op, Britain’s largest ethically run business, has been struggling in recent years, and Pennycook has helped right the sinking ship. Most executives in his position would have asked for more pay based on their success, but not Pennycook. Instead, he has publicly asked for a drop in his pay because of the reduced workload his success has created for him.
It’s an example to us all. It’s not unreasonable for top executives to ask for more pay when putting in the work on tough situations. But increased pay should not continue indefinitely. When the time comes, and the work is done, perhaps we could all seek less pay, in proportion with a changing role. Perhaps high pay could be constantly assessed against the reasons for which it was initially given.
There are doubtless other ways to rethink pay. What’s important is that we start by throwing out our assumptions and trying something new.