Executive Compensation and the Reputation of Business
Celebrated BBC journalist and broadcaster Robert Peston, has frequently commented on the high salaries and bonus culture in the banking sector and how, in hindsight they were part of the problem. Now Richard Lambert (UK CBI) in his most recent speech on "business reputation" at the Harvey Nash Annual Lecture called on Company Board’s to consider the impact of excessive or inappropriate remuneration structures on business’s reputation.
“There are no simple policy solutions. Suggestions of windfall taxes or a special super-income tax rate make no sense at all. And of course it’s true that banking talent is highly mobile, and can disappear overnight to friendlier climes, which means that unilateral action by one country would be very damaging. There is no one-size-fits-all approach to establishing the right rewards. But in the coming years of public austerity, it’s going to be especially important that compensation committees set demanding hurdles and rigorous processes for determining pay. They could do a lot worse than starting off with some guiding principles which are set out in a recent piece of work on the subject from the US Conference Board. It calls for immediate and credible action to restore trust in the ability of company boards to oversee compensation, and to that end it sets out best practice and clear guidance. Among other things, it says that the compensation committee should think like an owner, and ask itself whether the package would be paid out on the same terms if it had been negotiated on an arm’s length basis by the owner of the entire company. Not a bad starting point.”
“Time will help resolve this issue. Today’s trading conditions are exceptionally favourable, with very low interest rates and central banks injecting large slugs of liquidity into the markets. And profitability will be constrained in future as banks build up their capital reserves against their riskiest activities. But in the meantime, financial institutions everywhere face growing public hostility. The risk is that unless they find some way of hitting the reset button over the next year or two, politicians around the world will attempt to do the job for them.”
“The reputation of business has taken a severe knock during the recession, and not just in the banking sector”.
He outlined four reasons why business reputation particularly matters now: a loss of faith in markets, the need for environmental sustainability to be a shared national priority, greater transparency in the world, and the fact that these things can impact specific companies even more than business overall.
And he suggested how business might rebuild it’s reputation: it must build on its successes, such as saving jobs with flexible working, it must better communicate its role in society, it must respond to perceived weaknesses like remuneration and payment on time, and it must adapt to a more transparent world.
Commenting on this more transparent world he said:
"There are no secrets any more. In today’s world, information flows freely everywhere, and no institution - certainly not business - can hide behind a comfortable veil of obscurity."
He added: "In a world without secrets, the behaviors which build or destroy reputations become a matter of critical importance, whether you are politicians claiming expenses, the BBC paying its stars - or businesses making profits."
Outlining his suggestions for rebuilding the reputation of business, Mr Lambert said:
“First, business needs to build on its success. There’s a striking example of what I mean going on right now, and it’s not been properly recognised in the public discussion. If you’d locked a bunch of economists in a dark room a couple of years ago and asked them what would happen to employment if national output fell by 5.6 per cent, you can bet they would have come up with lots of different answers - and they would all have been a lot worse than the actual figure - which is a drop of 1.6 per cent. There are several explanations for this outturn, including successful government measures to support the labour market. But the big story is that employers and employees have agreed to make sacrifices to keep job losses to a minimum. Wage freezes and wage cuts. Short time working. In a way that has not happened before, people have understood the trade-off between wages and job security, and acted accordingly.
“This, it seems to me, implies a much improved flow of communications within companies, and a degree of trust between employer and employee that just wasn’t there before. And it’s not simply been a one-way street. Company directors in businesses I know have led the way by cutting their own wages first.
“We need to do more to recognise what’s going on here, and to remember this spirit of cooperation when the recession ends. We also need to do a much better job of explaining the role of business in society as the source of wealth and job creation, and of highlighting its positive impact on the communities in which it operates. I’m not just talking about corporate responsibility here, although that is important.
“But in addition, and in a much more systematic fashion than in the past, businesses need to be reaching out to schools, colleges and universities across the land, offering advice and support to young people and explaining in a way that careers advisers never can what the world of work is actually all about. They need to be working with the long term unemployed and the homeless, because they have a real interest in the health of the communities in which they operate. I’m glad to say that there are several very important initiatives now under way that are aiming to do exactly that.
He said business also needed to address some perceived weaknesses:
“The most obvious, and the most difficult, is the approach to compensation. Of course there are all kinds of reasons why pay levels for senior executives in our largest companies have risen so rapidly in recent years: the emergence of a global market for talent; much more exposure to the public eye; a shorter shelf-life for chief executives - I don’t need to list them all now. But it’s hard to argue that pay and performance have always been well aligned, or to dismiss the notion that compensation committees too often take the view that the executives under the watch of just about every company should be in the top quartile when it comes to setting their pay. That, of course, is a mathematical impossibility and a sure path to leapfrogging awards.
He also outlined two other problem areas:
“I’ll be brief about two other vulnerable points that companies need to think about when it comes to rebuilding reputations. One is prompt payment for goods and services, the cause of much anger and frustration among small suppliers everywhere. The other is the approach to skills and training. The majority of our businesses do a great job in this respect. But there is a long thin tail of companies that could do better.”
He added: “Finally, business is going to have to do more to adapt to a world in which there are no secrets.”
Mr Lambert ended his speech with a call for engagement:
“It seems to me important that business talks about these issues, and thinks about what needs to be done to rebuild its reputation.”
22 October, 2009
The CBI is the UK’s leading business organisation, speaking for some 240,000 businesses that together employ around a third of the private sector workforce. With offices across the UK as well as representation in Brussels, Washington, Beijing and Delhi the CBI communicates the British business voice around the world.
November 4, 2009 03:06 PM | Permalink