Performance? That’s not what top managers are actually paid for
By Ralf Wetzel, Professor of Organisation and Management at Vlerick Business School
The enormous sums earned by the stars of modern commercialized football, like Messi, Götze, or Ronaldo, frequently gives rise to much scorn and criticism, but at least their performance can be checked almost physically on the pitch each Saturday. That doesn’t hold true for the debate about the cloud-cuckoo-land of top managerial remuneration. In fact, individual performance is difficult for outsiders to ascertain and, in fact, it is quite irrelevant. The astonishing thing is not the sheer sums on the pay slips, but what they are paid for.
The public scandal of skyrocketing CEO pay
The recent popularity of Thomas Piketty’s book has poured new fuel into the fire of the constant debate about overpaid chief executives. He takes the criticism of executive pay to new heights by relating it to a broader analysis of society-wide income inequality. The debate as such was sparked by the financial crisis, in which bonuses and executive remuneration seemed to reward nothing but ego-centric, risk-taking, short-term thinking and in which a stark light was cast on the huge gap between the wages on the top floor and the shop floor. After the crisis had peaked, remuneration started to creep up again from its already high level. Accordingly, one of the core questions was: What could be behind such seemingly irrational developments?
It’s not about individual managerial performance
At the core of the public outcry stands the disbelief at the apparent fact that managerial pay is not linked to high individual performance anymore, and that any fair balance has been lost. Related research on leadership behaviour and company performance goes even further as it supports the impression that there is actually no such connection left at all. Recent studies on the link between CEO pay and company performance, assuming that individual managers’ actions had an impact on commercial outcomes and business development according to their payment, revealed no such link or even a negative correlation. CEOs’ pay packages and commercial performance seem to evolve quite independently from each other.
Viewed from an even broader perspective, the influence of individual actions, especially managers’ behaviour, on corporate development is starting to be called into question in its entirety. It all started with Henry Minzberg’s discovery of the highly unstructured, short-termed, operational, and ad-hoc actions filling a typical manager’s day in the 1970’s, which left insoluble blemishes on the idea of highly strategic, structured, long-term-planning and rational managers. Later on, it became clear that the impact of a leader depends less on the individual actions he or she might take, but much more on context; that is, how followers, other leaders, or other observers react to these managerial actions. A leader’s impact is determined by the interaction between leaders and the company. In this mechanism, the leader’s environment is usually far stronger than any single leader. The mask was pulled off the heroic image of managers and revealed as a romanticized belief. In short, the impact of a single manager, the relevance of his or her performance, especially in large-sized companies, is overrated.
Another kind of ballgame
The belief that managers are paid for their performance can be only regarded as a formal argument first and foremost, since it does not explain the vertigo-inducing figures on their pay cheques. The true game happens on a different level. To understand the hidden logic, an organizational view is needed to replace this purely individual-obsessed perspective.
Modern organizations need to maintain a façade, a skin-like surface to be presented to the outside world. Under modern conditions, there is no other way but to de-couple what happens inside organizations from what is perceived on the outside. Just like any other organization, be it soccer teams, political parties, hospitals, or even universities, companies need to present themselves as likeable, trustworthy, reliable, and efficient entities. All the political infighting, wasted resources, and the stupidity that seems unavoidable in organizations are veiled for one and only one purpose: to put external observers at ease about the company and to maintain a proper relationship with them.
Organizations choose their façades mainly according to how they want to be perceived by their environment, especially by their core stakeholders like clients, competitors, political observers, the mass media, or social and political movements, depending on their particular impact. Whenever employees cross the organization’s boundary to meet external actors, be it a sales rep on tour, a board on a press conference, or a complaints handler in a call centre, they become part of this skin. Managers, especially top managers, constitute a considerable part of this façade, since most of their activities consist of external representation. The fact that they appear at plenty of public events or that they represent the company in interviews, statements, and key account meetings turns them into an almost physical ‘face’ of their organizations. In many cases, their representative behaviour is more important than their actual internal decisions. Top managers are not there because they might have some extraordinary impact to the on-going everyday business. This is in the hands of middle managers and governed almost independently by informal communication. Top managers are there simply to show face. The salary package is also part of this façade. It stands as evidence of the potential strength of the company, of its capacity to play in a special league. It is a straightforward means to demonstrate reputation, legitimacy, and financial power. Put simply, it is the economy’s unique impression management tool.
This game is a ‘ballgame’ too, although not one played on the pitch, but in the company’s pants, and the masculine smell is no coincidence. Whether the individual manager is worth the money and whether he or she meets the behavioural and performance expectations is not unimportant, but it is distinctly – secondary. Reward systems are a show of power.
The effects of political regulation
Given that competitors in the industry are constantly observing each other, it is extraordinarily difficult for an individual company to change pay packages, as long as the entire sector does not move. The Bank of England is currently attempting such a move with unclear outcomes. Any attempt at reducing or changing incentives (i.e. from the short to the long term) happens under the threat of being perceived as either a weakling or a Grinch. Politically restricted pay limitations, publication requirements, or stronger shareholder rights could work as an external lever influencing the industry. However, such measures should not be overrated. They certainly won’t change the rules of the game; they will probably only change the valid ‘currency’ of impression management. If potential power cannot be demonstrated by means of fat cat payment, other symbols need to take its place. Accordingly, the risk is that such an intervention might shift the game to another pitch and an again hidden level of inter-company communication. Managers’ pay under the floodlights of media scrutiny – just like football players’ antics on and off the pitch – might therefore be a good way of increasing the pressure for change. But, as in football, it’s probably not a full solution. The ultimate ‘democratic’ response to overheated pay practices might be much simpler. Stop watching (soccer), stop buying (products), and start using your stake- and, if given, your shareholder power to real effect. A shift in demand and pressure from stakeholders is something that business understands much faster than any political regulation.