Tuesday, 30 June 2015

Performance-related problems

There is a very good piece by Anthony Hilton in the Standard today taking a swing at the mainstream corp gov approach to executive pay. No surprise, but I agree with pretty much all of it but there's one thing in particular that leapt out today -
The business fails to understand that setting executive pay is an art not a science. It is about human behaviour, motivation, perceptions of fairness, feelings of self-worth and how we interact with the people around us.
But the pay industry works on the basis of it being a science — that it is about the setting of rules, the application of mathematical formulae and the definition of targets. It seeks to impose mechanical controls on biological processes and then wonders why is does not work.
This coincides with the news that former Thomas Cook chief exec Harriet Green has agreed to donate a third of her share award to charity. As the FT points out today*, she was in charge of the company when it tried to block an inquest into the deaths of two children at a hotel on a Thomas Cook holiday. But don't let that make you think that the share award was undeserved -
Her spokesman said her award was entirely in line with the share price and earnings targets set by Thomas Cook and that Ms Green fully expected the size of her award.
This is exactly the problem Anthony Hilton identifies and an inherent problem with performance-related pay. If your primary interest is tying reward to performance then there are always going to be cases when good financial performance coincides with poor ethical standards, and execs will get large awards when the company they are notionally in charge of is severely criticised. Exec pay can be fiddled about with a million times, but as targets get ever more complex common sense is eliminated from pay decisions. You can hit financial targets in the midst of a scandal and simply end up with a bit less than you would have. From memory Rupert and James Murdoch only lost part of their bonuses when the hacking scandal broke.

People inside the system may wonder what the problem is, but to the outside world it looks like very rich people just getting A Very Large Amount Of Money, as opposed to A Very Very Large Amount Of Money when the organisations they are supposed to be responsible for do bad things. And it looks like this because this is what it is. Rem comms can protest that the science of performance-related pay makes these awards defensible, the rest of us hear that if you break the law, or put a few of your customers at fatal risk, as long as you make the numbers you still get paid handsomely.

And actually Harriet Green's decision to give away a third of her share award makes the same mistake again. Why a third? Either she accepts responsibility, and the need to make a sacrifice, or she doesn't. Yet the message here is explicit - I am giving away some of my money, BUT I MADE THE NUMBERS. Perhaps it's just me, but the first thing that popped in my mind when I read this was that it sort of suggests that two children dying isn't that bad. I mean if we're getting into the calculus of this, if two children dying equals a third of the award given up, does this mean if six children had died would she have given away the whole award? I feel a bit guilty even writing that, but it is the sort of question that these decisions create.

The current system of performance-related pay repeatedly creates these kinds of reputational problems, yet the response of most of the corp gov mainstream seems to be to try and find better targets. It would be much better to see a few executives give up their awards entirely when ethical standards slip, and for investors to push for this to happen more often. Unfortunately, currently the prevailing attitude seems to be, as Stewart Lee put it: No the money is mine

* I am pretty sure an earlier version of the FT article had a further line from Green's spokesperson seeking to blame the company's stance on legal advisers. 

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