‘Divine right of kings means the divine right of anyone who can get uppermost.’ Herbert Spencer
The remuneration of Chief Executives has increasingly become of political interest over the last decade as their pay has burgeoned in relation to average worker pay.
In the UK ‘for every £1 the average employee is paid, their CEO receives £129’[1], a ratio of 129 to 1 in favour of the CEO. In the USA the pay ratio is far wider having now reached 339 to 1 with the highest gap being a staggering 5,000 to 1[2].
With these figures and sums paid it is not surprising that CEO pay is controversial being viewed by many as inherently inequitable with too many CEOs being considered to be well overpaid. In response, the British Government decided in May 2018 to legislate that in future public companies ‘publish the ratio of what they pay their chief executive compared to the average worker’s salary’[3].
Proposals to cover private companies to comply with a governance code in the UK is currently being drafted, whilst meanwhile in the US large US companies from 2018 have already been mandated to disclose these ratios[4].
That the high pay ratio is unfair is rooted in people’s beliefs about ‘what is right and wrong’ with research as far back as 2003 into the ethics of CEO compensation finding that there was little evidence to support the claim that CEO performance justifies very high compensation[5]. The research additionally found that there is no consistent relationship between executive compensation and ethical CEO behaviour and that ‘evidence suggests that good CEOs can be overpaid’[6] as much as those who are less so.
The issue of CEO compensation is much about entitlement - what a CEO thinks they are worth - fittingly summed up by the Victorian philosopher and polymath, Herbert Spencer, in linking it to the Divine Right of Kings and observing ‘… the divine right of anyone who can get uppermost’.
The Divine Right of Kings was a political doctrine in defence of monarchical absolutism, which asserted that kings derived their authority from God and could therefore not be held answerable to an earthly authority. The evidence of history informs us that this belief is highly divisive between the leaders and the led yet many CEOs today ‘rule’. These CEOs are held in place by weak people around them that do not challenge or speak up with legislation and governance codes around pay ratios being unlikely to change the situation but this is where challenging the 'status quo' is vital (see blog ‘Change and Sandpaper’, 15th May, 2018).
A frequently used measure often used to judge CEO performance is that of shareholder value and how much has been added. This is not a real test of actual organisational performance for the value of shares can increase for a number or reasons and is not appropriate to private companies.
Financial results are a measure but these may on the surface look good vis-à-vis a previous year but against inflation, competition, and the market may not be the case.
By way of example, the retailer Marks and Spencer reported results for 1998 which showed profits of £1.15bn that allowing for inflation of 2.7% per annum over the last 20 years should now be some £1.9bn to hold profits in line with inflation. The reality is that M&S turned in £613m in 2017, a staggering £1.3bn short that allows for no business growth. Marks and Spencer like many other businesses are under-performing having been poorly led and as a consequence failed to deal with key issues around its business model.
A CEO plays a crucial role in the leadership of an organisation with their behaviour and actions in key areas impacting how much worth they individually add, or not, to their organisation and its performance. In our work we use a 360-degree scorecard approach in the following 8 key areas that examines and understands the effectiveness of a CEO through how they:
Establish and communicate the mission creatively and clearly;
Develop, communicate, and implement strategies to achieve the mission;
Allocate and control resources;
Choose key leaders;
Nurture and develop the future leaders and capabilities of the organisation;
Shape the culture;
Affect organisational performance;
Project the organisation to the public, shareholders, stakeholders, and customers.
From our experience few CEOs score well across all of the 8 functions as they favour certain of these to the detriment of others. Through examination of their diaries they do not manage their time well with the consequence that many organisations under-perform being poorly led.
Interestingly very recent research by two leading Harvard Business School professors into ‘How CEOs Manage Time’[7] supports our own experience with 72% of a CEOs time being found to be spent in meetings of which 32% lasted 1 hour; 21% lasted 2 hours; 13% lasted 2-5 hours; and 4% over 5 hours.
The consequence of this is that many CEOs neglect some of the 8 key areas and as the researchers found disappointingly only some 5% of the 72% of meeting time was with employees and just 3% customers[8].
More worryingly, the research shows that many CEOs believe they have ‘arrived as leader’ spending under 1% of their time on personal development[9] despite research showing that leadership skills decline with age[10] (see blog ‘Relevance, Obsolescence, Learning, and Adaptability’, 30th March, 2018).
Those CEOs who believe they have a 'divine right' need to heed the words of Plato: 'Be above doubt and an exemplar to all'.
‘Sandpaper Leadership’© 2018 is a highly pertinent and practical approach to optimising and sustaining organisational performance.
[1] ‘Executive Pay:Review of FTSE 100 executive pay packages’, Chartered Institute of Personal Development (CIPD), August 2017
[2] ‘Rewarding or Hoarding?’, Report prepared for Congressman Keith Ellison representing Minnesota’s 5th District, published 16th May, 2018.
[3] Sarah Gordon reporting in The Financial Times, 22nd April, 2018.
[4] ibid
[5] Perel, M. (2003) ‘An Ethical Perspective on CEO Compensation’, Journal of Business Ethics, Vol 4, pp 381-391, December 2003.
[6] ibid
[7] Porter, M.E., and Nohira, N. (2018) ‘How CEOs Manage Time’, Harvard Business Review, July-August Issue, 2018.
[8] ibid
[9] ibid
[10] Zenger, K (2017) ‘Do Leadership Skills Decrease with Age?’, Forbes Magazine, 21st Sept, 1971 and Zenger, J., Sandboltz, K., and Folkman, J. (2007) ‘Leadership Under the Microscope’, Orem, Utah.