Let’s Get Employees to Choose the CEO’s Salary
Who decides what the CEO takes home every month? Them? A senior committee? What might happen if you handed that decision over to your workforce?
In this blog we see what happened when we did just that at Happy.
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Who sets the CEO’s salary in your organisation?
In large organisations it is set by a remuneration committee, generally made up of other highly paid individuals, often disconnected from the workforce.
Which is why CEO pay just seems to go up and up. This Corporate Rebels article found that the typical CEO-to-employee pay ratio has increased to a staggering 202-1 in 2018 (up from 20-1 in 1996).
What if the CEO salary was instead set by the workforce?
The idea comes from a recent blog from Sarah Metcalfe (in response to the above Corporate Rebels article), when she asked “What if your people decided your pay based on how well you did as a leader?”
So I decided, as boss of Happy (though Chief Happiness Officer not Chief Executive Officer), to try it.
How Happy’s Salaries Work
At Happy we try to make our salary process as inclusive as possible. Salaries are assessed by a salary panel made up of four employees. Historically half of those were elected by our staff, but this year we have moved to electing all four posts.
First, we allocate a total amount to be given out - the salary pot. In past years this has been decided by the senior leaders. This year we decided to give the staff the chance to decide how large the salary pot should be.
At Happy all financials are transparent and I seek to explain, through a LEGO game, what the key drivers are.
Our financial year-end is September and so we got together in October for our six-monthly Happy Day. I covered the profit for last year, the inflation increases already being added to salaries and the forecast for next year.
People discussed the figures in small groups and then as a whole. Each person then put their proposal into an anonymous survey and we selected the average as the salary pot.
Given that their salary rise will be decided from that pot, you might expect people to go wild. In fact they were very reasonable and the pot came out slightly below what I might have proposed myself.
Once the salary pot is decided people put in proposals for their own salary. Some indicate the salary increase they are hoping for (about two thirds), some leave it to the salary panel to decide (about one third).
The salary panel can, and often does, award a higher increase than people have proposed if they feel the employee has understated their contribution.
I followed the same procedure. I filled in the same form and explained the contribution I have made over the last year, (this alone is quite useful for people to see) and proposing my own salary.
I suggested a 5.8% salary rise for myself, on top of inflation – slightly above the overall potential increase. Each person then completed an anonymous form to state what rise they proposed for me.
I have to say that I was a little nervous. I am the highest paid employee at Happy, earning 2.9 times as much as the lowest paid. Would people value my contribution? How would they reward it - especially as my rise was set to come from the same salary pot as theirs.
I was pleased when one of the first responses was “I would double that” and another went for triple. Overall 54% agreed with my 5.8% rise, 23% went below and 23% went above.
I felt valued and supported.
Should employees decide the CEO salary?
One response when I posted this idea on LinkedIn was that “having employees decide the CEO's salary could very well adversely influence the CEO's behaviour towards the various stakeholder groups, i.e. preferential treatment for employees to the detriment of shareholders, customers and the company itself.”
I have two objections to this:
One is the idea that employees aren’t able to evaluate their CEO in terms of the full range of stakeholders. As we saw earlier, give your people full information and they will take responsibility (as Jan Carlzon memorably said).
The second is that the way to get great customer service and great financials is to treat your employees well. One of the first business books I read as I set up Happy was The Customer Comes Second by Hal Rosenbluth, because the employee comes first. A mindset that led his travel company to win the Baldridge Award for the best customer service in the entire USA.
Happy employees = Happy customers = Happy profits.
Who should be on the remuneration committee?
In my opinion a remuneration committee for the CEO should have the majority of its members selected by the workforce.
What seems to happen at the moment is that the committee is presented with details of comparable companies and what the average CEO salary is, what it is for the top 50% and for the top 25%.
The predominantly alpha males on the committee of course see the company as being in the top 50% or top 25% and propose remuneration to match, resulting in the continual ratcheting up of CEO salaries.
(Interestingly, one study of Spanish firms found that where there was female representation on the remuneration committee, there were lower levels of CEO pay and CEO pay growth.)
If CEO salaries were decided by the whole workforce, or elected staff representatives, then that growth might never have happened.
Are you up for it? I would love to see a large company try this.
- How Well Do Your Staff Know Your Organisation's Finances — How would your organisation be different if everyone knew the organisation’s finances in detail? In this two-minute video, Pim de Morre explains what happened in a cookie factory when the Director explained the costs that went into producing each bag and why he couldn’t give staff payrises.
- 8 Principles From Some Of The Best Workplaces On The Planet — In January 2016, Joost Minnaar and Pim de Morree quit their boring corporate jobs to travel the world and visit the world’s most radical and engaged workplaces.
- Make Work More Fun — That’s the title of the inspirational book from Corporate Rebels, published in 2020. The rebels, Joost Minnaar and Pim De Morree, gave up their jobs five years ago to tour the world visiting the most exciting organisations on the planet. The book tells the story of what they found.
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