Chief Executives get richer by hiring remuneration consultants

stick_figure_crank_pound_500_wht_7405Organisations are using remuneration consultants to give a “cloak of respectabilityto justify over-generous pay increases, according to a study at Cambridge University.

Those that use external experts end up paying 7.5% more to their CEOs than those who set their pay in-house.

The Judge Business School analysed a thousand American companies and found a direct link between the hiring of executive pay consultants and higher CEO pay.

Professor of Finance Raghavendra Rau argues that the common practice of benchmarking pay against similar sized companies is counter-productive as it prompts each company to pay slightly above average.

“If everybody wants to be above average, the average will keep going up”  (and this applies to other aspects of organisational life e.g. see “No-one wants to be rated as average”).

It’s not necessarily the large multi-national consultancies – for example, Towers Watson, PwC, and Hay Group –  that are to blame as  when smaller “boutique” consultants are used CEOs are paid about 10% more.

Shareholders have been known to rebel against advice on boardroom pay e.g. at Aviva and Burberry.

Former chancellor Lord Lawson caused a storm last year when he described pay consultants as “a profession that makes prostitutes thoroughly respectable“. As you  might expect that didn’t go down well with the Remuneration Consultants Group which represents the industry and which said he was “ill-informed“.

I posted about the impact of using inter-company comparisons four years ago as I believed it had led to the inflation of public sector pay especially in those organisations which had been privatised.

Interesting as this latest study is, talking about 7.5 – 10% overpayment doesn’t mean much to the average employee when average pay for directors at British blue-chip companies rose by 21% to £2.4 million this year according to Incomes Data Services with CEOs taking home about £4.5 million a year.

Pay differentials between the top and the bottom of companies have never been more extreme, or obscene.  In America most people think that CEOs earn about 30 times what the average employee earns when the reality is it’s currently 350 times! No wonder some observers are warning that “the pitchforks will be coming out.