Wednesday, 25 May 2011

Paying Executives for failure

There is an interesting reflection about golden handshakes for disgraced board members, by Chris MacDonald on his businessethicsblog. It was apparently sparked by news that Dominique Strauss-Kahn may be paid $250,000 severence by the IMF. But there is also a wider issue here about why failed as well as disgraced board members are often paid off handsomely and also why senior executives around the world have enjoyed such an explosion in their remuneration, capturing an increasing proportion of company income. Chris Bones, former dean of Henley Business School has written well about this.

I believe a substantial part of the explanation is an identification or affinity issue: ‘this guy is one-of-us, we must treat him as we would wish to be treated’. Identification is linked to an ‘oligarch’ problem, whereby, as well as competing with each other, senior politicians, business people and bureaucrats share a common tribal identity and common interests;

…years ago I took part in a business game conducted over a weekend between teams carrying out real projects for small sums of money contributed by the participants. It revealed that winning the game was easy if you cheated, as long as few others did. Getting on to the game’s ‘governing board’ and using that to increase our pay, as well as taking bribes from the teams, proved a winning strategy. By analogy, if the top guys in the world/business all help and cover for each other then, as a group, they achieve an optimum outcome. To achieve this does not require formal agreement or even informal discussion. I think it just happens through identification - it is why board remuneration committees pay their colleagues outrageous amounts that are unconnected with performance. It has nothing to do with an expectation that the beneficiaries will return the favour, although members of a remuneration committee who are still active in business will benefit from a general rise in the remuneration of senior executives and board members. It is much more to do with comparabilities (See business leader Paul Judge on this) where executive pay is compared with that of other companies who, at the next round, are then compared with your company - creating an upward spiral of pay, benefits and status.

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