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Your pay should be driven by your contribution, not spurious comparisons

Oct 01, 2012 Business Daily, Management

“There is no conclusive empirical evidence that outside succession leads to more favorable corporate performance, or even that good performance at one company can accurately predict success at another,” …In short, executive skills cannot pass the most basic test of generality: transferability.”

CHARLES M ELSON and CRAIG K. FERRERE, “Executive Superstars, Peer Groups and Over-Compensation – Cause, Effect and Solution”
University of Delaware (2012)

A leading CEO once asked me why consultants produce surveys of executive pay. He told me this was an inherently undesirable thing because it had only a negative effect – pushing up pay in ALL organizations for no reason at all, through the ‘peer effect.’

He was right, and his instinct has been confirmed in a recent research paper by Charles Elson and Craig Ferrere, quoted above. This study from the University of Delaware has been making waves. The New York Times said that it “pretty much drives a stake through that old “pay ’em or lose ’em” line — what you might call the brain-drain defense. It also debunks the idea that companies must keep up with the Joneses by constantly comparing their executives’ compensation with that of similar companies.”

Back in Kenya, the Speaker of the House of Parliament won himself few friends recently by stating publicly that the bloated pay of Kenyan MPs – already egregious by any standards – was “peanuts.” He apparently based this judgement on peer-effect thinking: that MPs deserve more not because their work justifies it, but because they are “underpaid” in comparison to other folks like permanent secretaries and chief executives.

And so they should be. Reward for work that you do has nothing to do with what someone else somewhere else is paid. It has everything to do with the benefit you generate in the place that you work.

We can mock the MPs and their ill-justified greed, but can we really say leading corporate enterprises take a more enlightened view? Peer comparisons are widespread in assessing pay for the top folks. And guess what? They produce an inexorable upward force, pushing pay up for everyone. So “star pay” somewhere is used to push up “average” pay everywhere. Eventually, everyone is paid more, including, slyly, those giving out the pay awards: board members often follow up generosity towards executives with demands for better retainers themselves…

That’s the game that’s being played here, folks, and it can’t be sustained. Once pay outpaces productivity and results, the enterprise enters cloud-cuckoo land. As Messrs Elson and Ferrere ask, what is the basis for peer comparisons? The assumption is that executives are interchangeable, and could leave to do better-paid jobs elsewhere. But there is little evidence to support this. Most work is context and environment-specific, and relies on the accumulation of specific knowledge.

The researchers conclude that organizations “must develop internally consistent standards of pay based on the individual nature of the organization concerned, its particular competitive environment and its internal dynamics.”

In other words, it’s not what others do out there that should drive your pay; it’s what you do in here that matters.

Apply that to our famed MPs and the matter becomes clear. Can anyone in their right mind imagine that those folks are underpaid at a package of a million shillings per month? Or that their skills are transportable, and that they could do the work of captains of industry?

What seems ridiculous at the extremity bears attention at the average. We must all stop letting the envy of others drive up our pay, and work more towards understanding what value we create for the world. True success does not come from grabbing every possible dollar using spurious justifications; it comes from having a clear understanding of the impact of our work, and getting reward commensurate with our contribution.

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