Why is People’s Pay Problematic and Difficult to Manage? ©Professor Chris Rowley

© Professor Chris Rowley.
Complygate, November 2021

The subject of what amount people get paid - and for doing exactly what - is a very common media story and ‘after dinner’ conversation. It always generates lots of ‘heat’ and ‘noise’ and indignation from not only observers and the public, but also fellow workers. Recently is has been an easy target of what politicians get rewards for. Often is also investment bankers and senior business leaders, ranging from those at the former Arcadia Group and Sports Direct to the Renault-Nissan Alliance and Bet365.

This debate is heated by not only levels but also because it involves notions of fairness, equity and even ethics. This ‘hot topic’ is not only just about the large rewards at the top of organisations, with media headlines of ‘Fat Cats’, but also at the bottom end with ‘scrooge bosses’. Then there is the whole thorny issue of pay discrimination and this is often in the media in terms of gender, but it can also be by ethnicity. Gender pay gaps in the UK have at least been brought into the spotlight by the introduction of formal reporting. Therefore, people’s pay is an inordinately difficult area for human resource (HR) professionals to deal with operationally and to manage well let alone to try to integrate with business strategy.

A useful framework is to see rewards in a Kaplan and Norton (1996) ‘Balanced Score Card’ with its quadrant of perspectives. These are: Financial (how should we appear to shareholders); Customer (how should we appear to customers); Internal (what business processes must we excel at); Learning and Growth (how will we sustain our ability to change and improve).

However, one major issue is the lax lexicon bandied around in the area. Pay is an elastic concept. There is a huge variety of types of things that can both make up pay and comprise a total rewards package, with some looked at as more tax efficient, from gold Krugerrands to art and fine wines in the past. Then there are deferred rewards, such as types and components of pensions. A couple of examples show the complexity and problems here. The infamous leader of GEC, ‘Neutron’ Jack Welch was not only paid highly during his tenure, but this continued with his retirement. This included a US$417million (in 2001 terms) severance pay out and a huge and deep pot of perks. Not only was he paid as a consultant, but allegedly also had lifetime access to the company facilities and services he had as CEO, such as use of an apartment with living costs, sports seats, club fees, security services, restaurant bills and use of a jet, cars, offices and financial planning services. Croesus would have been proud.

It is insightful and useful to recall this given its echoes in a contemporary example of pay being part of the story of another ‘superstar’ CEO, Carlos ‘Le Cost Cutter’ Ghosn of the Renault-Nissan-Mitsubishi Alliance and his Icarus-like behaviours. He was very well paid by Japanese standards, but which perhaps was not the relevant comparator in his mind. There were plans concerning how to reward Ghosn both in light of the recent changes in Japanese law to make CEO’s rewards public as well as in his eventual retirement.

Interestingly, comparing these two cases brings out critical parts in the area of managing pay as they also show how ‘expectations’ and ‘acceptance’ about what is ‘normal’ about levels is set and varied internationally in light of the relevant comparators and the cross-cultural dimension. First, this has not only sectoral variations, such as, say investment banking versus retail versus charities. Second, this is the contrast between the more ‘gung-ho’ individualistic US versus the more consensual collectivist Japan. This plays out in terms of not only the amount of internal pay differential but also what is acceptable at the top levels – both dimensions high on the US but low in Japan.

So, we can see that pay – or rewards to give it its wider remit - is problematic and difficult for businesses and practitioners to manage, not only strategically but operationally. To help us better understand why that is it is useful to make the following initial points to help put our subsequent analysis into its required context. Rewards come in a quod of forms: Money (eg salary, incentives, expenses, etc); Benefits (eg pensions, cars, insurance, leave, working time, etc); Work (autonomy, environment, challenges, etc); Development (training, personal development, promotion, employability, etc). Of course, there can be a varied mix of high or low levels across each segment. A key starting point is the difference between intrinsic versus extrinsic rewards. While the former is the main area that is often focused on, not least as it is visible and has a ‘hard number’ attached to it, the later has a key part to play in systems and explanations of what might at first sight seen low levels of rewards.

Some might argue that surely pay reflects some sort of defensible, objective, rational criteria and factors. For example, remuneration could be based on the job or the person. If it is the job itself that attracts a set level of rewards, then job descriptions leading to some form of job analysis – with its nod to objectively - could be used to produce a salary structure. If it is the person that is being given a certain level of reward, then perhaps criteria such as skills, experience and even seniority could be used. Additionally, there could be a remuneration system that actually rewards measurable ‘achievements’ or ‘outcomes’ with some form of ‘pay for performance’ or variable pay or ‘at risk’ system. Within this could be stock option schemes and also profit sharing, which are not new, for example, Rowntree the chocolate manufacturer introduced a scheme back in 1916.

However, such performance systems have five inter-locking systemic design problems. First, the exact micro components of performance selected to be measured are anything but objective. Second, there is the correlation versus causation in any achievements. Third, there is a counter factual – the measured outcome may have happened anyway without any intervention. Fourth, there is a ‘line of sight’ issue, meaning the time span between 1) the effort, achievement and performance 2) the results 3) the final reward for it, as the longer this ‘sight’ is the weaker is the motivational power. Fifth, systems generate a ‘what get measured gets done’ staff syndrome. While in one respect that is exactly what pay system designers want, they all too often forget that this will come costs – the neglect of other aspects of the job which are not measured.

In conclusion, the topic of pay retains its high profile and interest for people, practitioners, policy makers and the media. This is often due to the common – yet often unacknowledged - tendency of people to look at pay levels and judge them as fair and equitable or not on the basis of their own experience of rewards. Alas, this is a little ethnocentric and the wider cultural and institutional content needs to be recognised in a more global perspective of rewards. Only then will one person’s ‘unfair’ or ‘inequitable’ rewards be better judged.

Reference

Kaplan, R.S. and Norton, D.P. (1996) The Balanced Scorecard: Translating Strategy into Action, Boston, MA: Harvard Business School Press