Procurement Intelligence Unit

Executive pay has been a leading issue in the business press over the past year. But how important is it? And can procurement make a contribution?

A year-long investigation by the UK High Pay Commission reported today that executive pay has increased by 4,000% over the last 30 years. The equivalent rise in the average wage was three-fold.

The report states: “'Stratospheric increases in pay are damaging the UK economy - distorting markets, draining talent from key sectors and rewarding failure.”

This reflects a similar piece of work conducted by the US Congressional Budget Office earlier this year which found that between 1979 and 2007 the real after-tax income of the top 1% of earners rose by 272%. Other figures show that the top 1% of US earners controls 40% of the nation’s wealth.

The report fuelled the emergence of the #Occupy movement, which has seen the ‘99%’ organising protests around the world.

Although it's pleasing to see that technical research pieces have received such attention from the general public, the consequent debate has generated more heat than life, with many in the public domain calling for caps on the highest earners.

The corporate head-hunter, Heather McGregor argued on BBC Radio this morning that those arguing for worker constraints on executive pay would be akin to allowing children to set their own pocket-money and those exposing such views should ‘move to Cuba’.

There is possibly room for compromise between these two positions.

Staff pay is considered somewhat of a taboo for procurement. Even those most mature of organisations, whose purchasing department reaches all areas of spend, stop short of involvement of staff remuneration. Many look at temporary workers, others examine consultants’ and contractors’ fees, but the largest area of corporate expenditure is entirely off the radar for buyers.

The reason for this is partly attributed to the unusual status of staff pay, governed as it is by a dedicated HR function. The issue of executive pay is double complicated, with payment committees and special governance structures which aim to marry the costs of leaders against the desires of shareholders.

It seems that, however, this system has not served business (and by extension the entire economy) particularly well. The evidence appears to show that the tension between principal and agent has resulted in a situation excessively favourable to the managers. Those structures which nominally guard against such development have gradually relinquished the application of those checks which prevent over-inflated pay.

Yet the subtleties of this dynamic are only apparent in the detailed longitudinal studies which carefully collect evidence over the long-run. And that the current rate of rent-seeking by the highest corporate earners has not reached levels experienced since the period immediately preceding the Great Crash is also indicativel of the sub-optimal nature of this resource allocation.

Perhaps this sort of detached analysis of such a high level of pay can also be conducted within the companies? Although procurement may not want to supplant the role of HR in the grading of staff, its single-minded focus on cost may provide a tempering influence to the executive pay levels that have exploded so dramatically over the last decades.

The benefit of more constraints on pay-packages will surely extend beyond the company to broader society.

Another issue relates to CPOs. Do these top-level procurement executives also receive such high levels of compensation? And is this higher pay level better for the company?