Should Employees Choose CEO Salaries?

HappyHenry
Written by HappyHenry February 05, 2022

Who sets the CEO salary in your organisation? In large organisations it is often a remuneration committee made up of other highly paid people who may be disconnected from the workforce.

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Which is why CEO pay just seems to go up and up. This Corporate Rebels article found that typical CEO pay has increased to a staggering 202-1 in 2018, up from 20-1 in 1996.

What if the CEO’s salary was set by the workforce? This idea comes from a blog from Sarah Metcalfe (inspired by the Rebels article). She asked “What if your people decided your pay, based on how well you did as a leader?”

I decided, as boss of Happy, to try it (though I’m Chief Happiness Officer, not Chief Executive Officer).

How Happy’s Salaries Work

Happy is a learning provider based in London. We try to make our salary process as inclusive as possible. And salaries are assessed by a panel of four employees. (In the past, half had been elected by staff. This year they elected all four.)

First, we allocate the salary pot (the total to be given out). Previously this had been decided by senior leaders. This year we gave staff the chance to decide how large the pot would be. All our financials are transparent and I explain, via a Lego game, what the key drivers are.

Our financial year ends in September. In October we got together at our six-monthly Happy Day. I covered the profit results for last year, plus the inflation increases already being added to salaries, and our forecasts for next year.

People discussed these figures in small groups, and then as a whole. Each put their proposal into an anonymous survey, and we selected the average as the salary pot.

Given that salary rises will be allocated from that pot, you might expect people to go wild. But they were very reasonable and the result was slightly below what I might have proposed.

Once the pot is decided, people put in their own proposals. Some indicate the increase they are hoping for (about two thirds), and the rest leave it to the panel to decide.

The salary panel can, and does, award more than people have proposed if they feel an employee's contribution has been understated.

What if the CEO’s salary was set by the workforce?
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My proposal

I followed the same procedure. I filled in the same form and explained the contribution I’d made over the last year. This is very useful for people to see.

I proposed a 5.8% salary rise for myself, on top of inflation – slightly above the overall potential increase, and left it for them to fill in an anonymous form to say what rise they proposed for me.

I was a little nervous. I am the highest paid employee at Happy, earning 2.9 times as much as the lowest. Would people value my contribution, knowing my rise comes from the same pot as theirs?

I was pleased when one early response was “I would double that”, and another went for triple. Overall, 54% agreed to the 5.8% rise, and 23% went below and 23% above.

I felt valued and supported.

Should employees decide the CEO salary?

I posted this question on LinkedIn.

One response was: “Having employees decide the salary could adversely influence CEO behaviour to stakeholder groups and encourage preferential treatment for employees to the detriment of shareholders, customers and the company itself.”

I have two objections to this:

  • The first is the idea that employees aren’t able to evaluate the CEO in terms of the full range of stakeholders. But, give your people full information, and they will be responsible (as Jan Carlzon said).
  • The second is that the way to get great customer service and financials is to treat employees well. One of the first business books I read when setting up Happy was “The Customer Comes Second” by Hal Rosenbluth, because employees come first. And his travel company had just won the Baldrick award for the best customer service in the USA.

Happy employees = Happy customers = Happy profits

Who should be on the remuneration committee?

A remuneration committee for the CEO should have the majority of members selected by the workforce.

At the moment, it seems the committee is given details of comparable companies and what average CEO salaries are for the top 50% and the top 25%.

The predominantly alpha males on the committee like to see the company as being in the top 50% or 25%, which means a continual ratcheting up of CEO salaries.

(One study of Spanish firms found that female representation on the remuneration committee results in lower levels of CEO pay and pay growth.)

If the salary increase is decided by all staff, or their elected representatives, that growth might never have happened.

Are you up for it?

I would love to see a large company try this.

This is a guest post by Henry Stewart, founder at Bucket List company Happy Ltd in London. For more information on Henry and the company, check out his rebel page.

Written by HappyHenry
HappyHenry
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