We have heard it all before. Performance must be rewarded. This is where we all agree. Where opinions divide and arguments become a bit nasty and personal, is when executive pay and super bonuses are brought into the picture. To be more specific — executive pay and bonuses that is hundreds, if not thousands of time more than those of mere ordinary workers. Are these super salaries justified? Where do Saudi and Gulf top executives reward rank in the world, and should our local high flyers earn more?
Some argue that executive pay, in the form of millions in basic salary, bonuses and free shares from a grateful company, has become divorced from reality. It is not about money per se anymore for some super CEO’s, but about self-worth to the individual. Of course, an additional 10 million or so in a salary increase or bonus makes one rub shoulders with a new set of social climbers and friends, so money is also somewhat important. What seems to have emerged in a fast moving and globalized world, is that directors of mega companies are comparing themselves with their peers and do not wish to be left behind. CEOs seem to judge their own value in comparison with other CEOs.
What irks the rest of us who are not in this super league, are the seeming “excesses” of pay rises and bonus allocations. However, a glass can be half full for one and half empty for another, and chief executives might disagree. Some point out that they had left extremely good jobs and positions in stable and growing companies, to try and turn around ailing ones, a move which might have spelt the kiss of a career death for many. The super rewards they then obtain are a measure of their business and management skills in bringing about substantial value added shareholder results. Secondly, not everyone really wants to be a chief executive, especially for publicly listed companies with an ever-increasing demand for more transparency, accountability and multi-stakeholder management. How some of the present Saudi and Gulf listed company chairmen and CEOs now wish they had remained private-owned entities, in the face of tumbling share market prices and investor revolt.
Companies generally stress that the seeming stratospheric salaries and benefits are linked to company performance, and should be seen in the light of actual performance over time. Good management is always rare to find, and super good management is in a separate category altogether. It is this smaller, super management elite group that attracts most media coverage concerning pay and performance. In the end, the shareholders hold the key — either they are in agreement with the board’s decision to grant such pay rises and perks, or they are not, and they can vote the rascals out. In general, the majority of publicly listed companies are owned by institutional, rather than individual investors, and institutions stick together, as rocking the pay boat in one company will come back to haunt them in another.
This does not mean that “excessive” pay rises are always automatically granted, especially if the company performance has not recently been up to par. The operating culture of an organization also has a lot to play in the size of executive pay. In the US, senior management live or die, it seems, on their quarter results. As such, they live on a short-term leash of high performance pay, and the fear of investor backlash following negative quarterly performance. The large pay packet is a self-survival instinct — for who would want to hire a seeming loser at the same level of pay? By contrast, companies in Europe and the Far East take a more sanguine long-term view on management performance, and hence the European pay packet is somewhat lower than those of the US.
One solution can lie with an external remuneration committee. This can consist of a small group of board members who construct chief executives pay and bonuses. It is made up of non-executive directors, whose job is to represent shareholder interests. They can examine industry benchmarks, company performance and tangible value-added by the chief executive and senior management. Where does one find such principled arbitrators? The trouble is that many of these non-executives are themselves executive directors of other boards, and have similar pay packages that might need approving in their companies.
One then goes back to what is “fair” and “equitable” to attract top-notch executives, so as to reward them for taking the major risks that few managers wish to take on. In the Middle East, very few private held companies delegate authority and responsibility to non-family members, and hence management salaries and bonuses are at the discretion of the business owner. That seems to suit both parties, but few high flyers will opt to work in such an environment, and family business performance might not be optimized. The situation is changing in the Gulf, as more companies go public and top managers now compare themselves with peers in other listed companies, both in terms of industry performance and pay structure. Gulf companies are also going global, and the management of such entities now requires a completely different set of management skills compared to domestic operations. Should there be large pay variances, then market forces will soon level them out. At the same time semi-government or large government institutions have to review their current salary scales and bring them in line with the private sector, if they wish to attract the brightest and best of management. Only by such an infusion, and the setting of higher and tougher performance standards, will some of the semi-efficient government entities turn around.
In comparison with their international colleagues, the pay scales and bonuses of Saudi and Gulf private sector executives are on the low side with respect to the economic, social and working environment they have to operate in. Traditionally, pay scales have been augmented by so-called hardship posting allowances, or danger allowances, but very rarely do mega-performance related bonuses play a role.
In the more competitive, post-WTO accession of the Kingdom, Saudi companies have to now operate under tougher conditions. This is putting a strain on management. By providing extraordinary incentives, Saudi and Gulf companies can attract extraordinary management talent that are able and willing to take additional risks, and so unleash a new generation of local bred “managerial tigers.” In the end, if the companies prosper more rapidly, both shareholders and the rest of the community can only prosper. It is time to think outside the box of fixed contracts.
(Dr. Mohamed Ramady is visiting associate professor, finance and economics at King Fahd University of Petroleum and Minerals)
