How to restructure executive pay

The question of why there has been such a deafening silence from HR organisations and senior individuals on the issue of excessive executive remuneration is addressed elsewhere in this issue (see page, 28). But my view on it is simple: this is the single biggest issue for HR practitioners and thinkers of the year, if not the decade, and if 21st century HR is to have any impact it has to step up to the mark and it has to do it now. This is core HR territory, yet we are letting politicians, regulators and media commentators drive the agenda.

So, I thought I would start a debate here with a more detailed development of an earlier proposal for radical change Henley Business School launched in the summer. I urge you to read it and to send me your reactions. All thoughts, criticisms and counter-proposals will be taken on board to help produce a substantive policy paper. We will publish and present this in our meetings with Government, regulators and other opinion formers later this year. It is based on three principles.

First, the market is the only mechanism for creating the wealth we need to sustain the society in which we live and those who risk their own capital should be able to reap the rewards of that risk: the greater the risk, the greater the reward. The market, however, has to act within frameworks and regulations that ensure the greatest benefits accrue to the greatest number of people.

Second, employees of corporations with limited liability whose personal capital is not at risk in the case of failure are stewards of other people's wealth and capital and, as such, should not attract the level of reward open to genuine entrepreneurs.

Third, there is not a finite number of talented people able to run organisations and be paid in multiples of 100s more than the average wage. There are many talented people out there and executive pay should be structured as follows. An annual salary should be benchmarked in the normal way to reflect the responsibility, scale and potential impact on the organisation and its customers, suppliers and shareowners of the role.

There should be the chance, subject to performance, to earn up to 100% of that salary in any one year in the form of a cash bonus or 200% if in a scheme where only 50% of any annual award was paid out and 50% put into a bank which would only be payable out in full on retirement or redundancy. The bonus target should be set against the norm for the sector.

In the private sector, where competition demands, there could be a longer term plan where awards of shares would be put into a trust for the executive on the basis of both performance and the critical need to retain their services. Withdrawals from such trusts could not happen for at least three years and then only at a limited percentage of the total value. The trust would only pay out in full on retirement or, if leaving earlier, perhaps three years after leaving.

There should be reinforcement from government and regulators where appropriate as follows.The top rate of income tax would apply to earnings up to these limits: cash payments of anything more than 100% of salary in any one year would be taxed at a much higher rate (say, 90%), unless they were put either into an approved charitable vehicle whose object was to pay out at least 50% of its funds each year to good causes, or into a venture capital vehicle with objectives to invest at least 50% of its funds each year into small enterprises.

The performance measures in industries where regulators exist should be approved by the regulators as well as shareowners.

With this kind of structure we could put limits on the overall value of packages. They would only inflate significantly if the organisation created significant value for its owners. That is real capitalism.

- Chris Bones is dean of Henley Business School; chris.bones@haymarket.com