Curbing Top Pay is a Stunt That Hobbles Motivation

Freezing top directors' pay plays to the public gallery but it creates problems in remuneration structures rather than solves them. Who wants to run Barclays or Shell if it means forfeiting the reward?

If a high pay culture runs right through an organisation, tackling it only at the top leaves a rich cake, covered in a fat layer of marzipan, but spread with only a thin coating of icing.

Management at every level must have an incentive to improve and people will not seek promotion unless there is sufficient extra pay.

It is top salaries that receive publicity, not least because directors' rewards are revealed publicly and voted on. And last year, Royal Dutch Shell's shareholders voted against the remuneration report. The oil company has thus written to investors pledging to freeze and cut pay.
The chief executive, finance director and head of exploration and production will receive no pay increase for 18 months and two of them are being paid 20 per cent less than their predecessors. Bonuses will be tied to performance (environmental as well as financial), paid over the long-term and with no discretionary boost when targets are missed - the reason for last year's rejected remuneration report.

So the heads that are above the parapet get hit: but what of Shell's other highly paid managers? The same question can be asked at Barclays, where the chief executive and president have nobly waived their bonuses while the bank still pays £2.7bn of bonuses to the lower levels. The 23,000 investment bankers will receive bonuses averaging £191,000.

Shell is trying to appease its owners and the press while Barclays' sacrifice is aimed at its critics in government and the public. But both publicity stunts distort what should be carefully constructed corporate hierarchies. Bank clerks expect to be paid less than their department heads and senior staff should to be paid more than their subordinates. Bank managers receive more than their deputies. The size of the differential can be debated but it cannot be abolished: workers need aspirations and promotion to a better-paid position is a worthy objective for both the individual and the employer.

The lesson for staff at Shell, Barclays and other companies that react to criticism by curbing top pay is that there is no point trying to climb the career ladder.

Even companies adopting flattened management structures have differentials between the levels: indeed, the fewer the strata, the bigger the step in pay between them. Firms that limit top pay are imposing a plateau on what should be a rising pay curve: promotion produces a very small pay increase just as taxes take an increasing share of income.

If organisations are overpaying, then the salary freezes and cuts have to be at every level - a lesson the BBC has been slow to learn. A curb at the top can grab headlines but it stores up trouble lower down.

(Pic: pinkiwinkitinki cc2.0)