Shareholder revolts over pay at FTSE 250 companies rose sharply last year as investors tried to rein in excessive executive remuneration”, says the Financial Times in February 2020. According to the Investment Association, this will dominate investor-corporate board discussions this year.
Is the implication a lack of trust in corporate social responsibility? It’s thought that much attention will be focused on whether or not companies have paid attention to the dissent among the capital investment community in previous years’ votes on remuneration policy. And, of course, this year sees another key disclosure indicator mandatorily released: the ratio between pay at the top and ‘average’ employees.
Contrasting perspectives: employers v employees
Our latest annual survey for the CIPD published in December 2019, for the first time matched the view of HR respondents with the voice of the workforce at large. And on questions that may be inferred to indicate levels of trust, the HR view that in 60 per cent of cases dialogue within the organisation takes place under the heading of fairness, is shared by only 10 per cent of employees. Part of the problem seems to be that, in two-thirds of cases, organisation managers hamstring themselves by not even having a clearly articulated sense of what ‘fairness’ in managing remuneration throughout the organisation means.
Where employers do have a working definition of fair pay management, we find that they also tend to encourage more dialogue between managers and employees about remuneration issues. And, interestingly, where there are more women in management in an organisation talk about fair pay increases. When management is majority female, some 80 per cent of employers engage in dialogue with their employees about the fairness of processes for managing remuneration, and three-quarters discuss the fairness of outcomes from them.
We found that employers were missing a trick even when they could evidence having policies in place to communicate about remuneration, including its fair application. They may have action plans and corporate narratives but, based on the view from the workforce at large, these tend not to make it into employees’ consciousness. All pointing to problems in creating and sustaining trust.
The survey evidence again shows the contrast between policy shapers and those targeted by it. In three-quarters of cases, HR respondents claim that a majority of the workforce is fairly paid, with only five per cent saying that fair pay applies only to a minority of the workforce. By contrast, only a third of employees when asked the same question feel that a majority of the workforce is fairly remunerated and almost a quarter of respondents believe that no-one or only a minority are paid fairly. What about the workers’ view on top executive pay? Contrasting with over 90 per cent of HR specialists who say their CEO is fairly paid, just 20 per cent of employees feel their boss’s pay is about right; and a third think it’s too high.
Disclosures, communication and consequences for trust?
OK, so there seems to be research evidence to suggest that not only investors but also employees don’t trust their top managers and, by extension, the non-executive directors whose task is to regulate corporate pay determination. But why is trust important in organisations? How is getting an understanding of trust and ways of creating and cementing it important to corporate leaders?
It is forty years since publication of this statement by psychologists John Cook and Toby Wall: “In general, the consensus of opinion is that trust between individuals and groups within an organization is a highly important ingredient in the long-term stability of the organization”. They related this also to “the well-being of [an organisation’s] members.”
However, while trust is a valid concern when thinking about organisations and leadership, including the sub-theme of rewarding leaders and others in comparative terms, it has been remarked that scholarly attention leaves a lot to be desired. In a mid-1990s analysis, Roger Mayer and his colleagues, writing in the Academy of Management Review, included problems of definition, of linking what precedes trust and its maintenance in organisational relationships, and inadequate attention to both the trusting party and the party to be trusted. To make progress they recommend adopting a more holistic view of trust, using knowledge from a variety of disciplines, rather than limiting consideration to a single perspective.
Space considerations preclude following up on this call to action here, but it’s something that the thoughtful manager may wish to investigate to inform practice. To repeat, our finding from the 2019 survey was that fairness has been poorly defined if at all, with negative consequences for outcomes. The same conclusion probably applies to trust, and the interrelationship between the two.
Ronald W. Perry and Lawrence D. Mankin in 2007 analysed the interrelationship between trust in the chief executive and employee satisfaction at work. And, also in the USA, some recently reported research discusses the implications of corporate ‘spin’ in the language used to communicate publicly about the ratio of CEO pay compared with that of the ‘median employee’. Data analysis by Audra Boone and colleagues in 2019 finds that US firms with the largest pay ratios tend to use scope within the regulations to ‘finesse’ the picture painted in an attempt to mitigate against the position reported and that the language used in the disclosures is consistent with such a priority.
These initiatives apparently run contrary to the advice from firms’ consultants to keep reporting strictly factual to avoid appearing defensive. And media reporting suggests that the more the spin the less convinced observers are about the legitimacy of the disparity and its rationale. An obvious question is ‘what are they trying to hide?’ Thus, it seems trust in an organisation’s management can be undermined not just by zero communication about relative reward management outcomes and processes. There are questions surrounding the character of the communication – and here one of the definitional issues Mayer and his colleagues highlight is key: paying attention to how the non-managerial party being asked to trust will view the communication. Not just to get it past those overseeing internal corporate governance arrangements.
What are the implications for practice?
- Corporate leaders may wish to spend some time getting a working definition not only of policies for managing reward, but also to ways of contextualising them, with fit for purpose shared understanding of what their application imply for perceptions of fairness and trust within the particular organisational setting. Reward management is not simply an economic factor of production – it has a psychological and social character.
- Top managers and those who advise them, as well as those accountable for internal oversight of executive decision taking, would do well to stand in the shoes of those on the receiving end of their communications. When talking about the organisation’s approach to reward and the outcomes of its application, time devoted to consideration of the amount and choice of language may be a sound investment of executive time, avoiding a lack of authenticity and the consequent need to spin the message even more when the rhetoric is judged by others to fall short of perceived reality.
- They might also want to reflect on ways in which greater leadership diversity – not just in terms of gender, but that’s a starting point according to our survey evidence – may help broaden thinking about managing reward in its socio-economic contexts, so as to build sustainable legitimacy for the decisions made and how they are arrived at.
- And, as suggested in a post to the Harvard Law School Corporate Governance blog in July 2019, the board might ask itself if it wants to bring in an independent outsider to review of how human capital issues are managed generally.
‘An Integrative Model of Organizational Trust’, by Roger C. Mayer, James H. Davis and F. David Schoorman. The Academy of Management Review, Vol. 20, No. 3 (July 1995), pp. 709-734.
‘CEO Pay Ratio: Leading Indicators of Broader Human Resource Matters?’ Posted to the Harvard Law School Corporate Governance Forum, by Mike Kesner, Tara Tays, and Ed Sim, Deloitte Consulting LLP, on Sunday, July 21, 2019.
CIPD Annual Reward Survey 2019 available at https://www.cipd.co.uk/knowledge/strategy/reward/surveys
‘New work attitude measures of trust, organizational commitment and personal need non‐fulfilment’, by John Cook and Toby Wall. Journal of Occupational Psychology, March 1980.
‘Organizational Trust, trust in the chief executive and work satisfaction, by Ronald W. Perry Ph.D., Lawrence D. Mankin, Ph.D., Public Personnel Management, June 2007.
Working paper: ‘Spinning the CEO pay ratio disclosure’ by Audra Boone, Texas State University, Austin Starkweather, Vanderbilt University, and Joshua T. White, Vanderbilt University, November 18, 2019.