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Has the corporate world come up with a brilliant new ploy to pay CEOs even more money? According to a recent study, 45 of the UK’s top 100 companies pay their CEOs a special bonus for ethical business management.
If executives are considered by the compensation committee of their board of directors to have achieved certain environmental, social and governance, or ESG objectives, they will be financially rewarded. These goals may include preventing environmental damage, combating climate change, improving the diversity of the workforce, or socially responsible behavior.
Some shareholder pressure groups are starting to balk at the very idea of ESG or ethical bonuses.
I think if you pay someone to run a business you shouldn’t give them a bonus for doing their job properly, said Martin White, director of the UK Shareholders Association and a veteran of the campaign against it. which he considers excessive salary on the board of directors. He believes that running a business in a way that does not harm the environment, the workforce or the company is already part of the CEO’s job and should not require additional payment.
If you have an executive who won’t behave well unless you give them a bonus, should you really give them the management of our businesses? He asked.
White argues that ethical bonuses could even prove to be counterproductive. In seeking to achieve ESG objectives, the leader will be motivated by money rather than an innate desire to be a good corporate citizen. The fact that there is money to meet these goals could cause employees to cover up the company’s ethical lapses in order to gain the boss’s favor.
Annabel Denham of the Institute of Economic Affairs says ethics bonuses are “a good way for companies to deflect criticism.” (Photo courtesy of Denham)
Annabel Denham, director of communications for the Free Market Institute of Economic Affairs, also has doubts about the ethics bonus. Although she sees it as a matter for the board of directors of a company and its shareholders, she thinks that a financial reward for good corporate behavior looks suspiciously like a trick.
I think it’s just an opportunity for companies to pay their CEOs more without being lambasted by social media and the public, Denham said.
Executive pay increases are much easier to defend when tied to a good cause.
I think this ethics bonus is a good way for companies to deflect criticism, she said.
Criticism of executive pay has fluctuated in Britain over the past three decades. Despite political controversy and the occasional shareholder rebellion, the overall level of compensation for board members has continued to rise inexorably with the average salary of the CEO of one of the UK’s 100 largest companies, reaching now over $ 5 million a year and increasingly diverging. more broadly from the worker’s average wage.
ShareAction’s Simon Rawson (Photo courtesy of Rawson)
CEO to employee pay ratios have increased year over year. They’re now averaging around 200 to 1, said ShareAction’s Simon Rawson, who advocates for making investing a force for good. So the CEO earns 200 times the median salary of workers, Rawson said.
The equivalent figure in the United States is over 260. But while Rawson believes executive pay is too high, exacerbating inequalities and threatening social cohesion, he is not in principle opposed to the ethics bonus.
I think the goals that inspire companies to behave sustainably aren’t in themselves a bad thing, as long as they’re tied to the right goals, he said.
Roger Barker, director of policy and corporate governance at the Institute of Directors, which represents UK business leaders, agreed.
“Financial incentives really matter,” says Roger Barker of the Institute of Directors. (Photo courtesy of Barker)
Running a successful business, especially over the long term, depends on more than just striving for financial success, he said. You must integrate these ESG-type criteria into the performance measures of the compensation plans.
But why do executives have to be paid more if they do the right thing?
It’s all about the incentive, he says. The reason for having these additional incentive plans is to really motivate management to achieve certain goals. Financial incentives really matter. They affect behavior, Barker said.
But critics complain that executives are actually marking their own homework. The board can massage the goals to make them easier to achieve and to ensure that the bonus will always be paid. Critics say if executives want to show how truly ethical they really are, the best place to start would be to remove the ethics bonus from the company.
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