The bonuses of executives should be decreased in fair proportions!

Nowadays, it has become an annually phenomenon. Every year, the Dutch newspaper ‘De Volkskrant’ publishes the results of their own research concerning the fee of top executives of several large enterprises in different sectors. Each time, it turns out that the difference in premiums between the top executives and the ordinary employees gets larger and larger. The ordinary employees are receiving a limited increase of income, while the top executives of the company are receiving large expansions of wage, loyal bonuses and additional retirement pension premiums. The ratio between the fixed rewards of top managers against the rewards of the employees with the lowest wage has been raised to the factor 50 or even higher. In other words, one hour of work for the top of the company is equal rewarded to more than one week of work for an ordinary employee! The top management explains this difference using arguments such as: unique talent on the top is scarce, for less reward it would be impossible to find good managers in international context, the wages of executives outside the Netherlands are even higher, increased share prices indicate that the top managers are worth the money, or the critical people are just jealous.

There is no single word mentioned about the intern ratios between the premiums of ordinary employees and those of the executives. Nevertheless, the reasonability, fairness and the defensibility of the intern ratio between the premiums are of great importance as well.

Apparently, top executives, supervisory board and the remuneration committees do not pay much attention to intern ratios. It seems, the people mentioned before are living in another world and reflect their decisions in that world as well without focusing on the real world outside. They are like sons of God living on the Olympus, refusing to look upon the normal, real world and the base of the mountain.

The FNV is against the provided arguments of the top managers for high premiums and rewards; those arguments are just sophistries for high bonuses. Why unique top talent? The big problems in the world of banking proved the lack of skills of our ‘top talents’. For what reason is it impossible to find the same talent against a lower wage? This phenomenon is all about the lack of intrinsic motivation of those people to do a good job. Consequently, this is an offence against people who are qualified for the same position, but motivated to do their job against a normal reward. The way of acting gives a wrong sign to the society: apparently, if you are a ‘talent’ you have to ask a lot of money for doing your job, because otherwise you are not a talent at all. This idea of working is not in line with professions like nurses, teachers, police officers and more, for these jobs there are unique top talents as well however. They do not earn that much money, but are still motivated to work excellent.

The wages of executives outside the Netherlands are even higher. Yes it is, when you are benchmarking the wages of top executives in a selective way! Even more when you are comparing the Dutch loans with higher paid examples from abroad. Consequently the premium becomes larger and the median will rise as well. Because of that, a causal affect arises because of the use of wrong data. Unfortunately, the top executives do not want to compare their bonuses with the premiums of lower paid companies abroad. Well, as a matter fact they do look at the wages of lower paid companies, when the wages of ordinary employees is benchmarked.

The top deserves the high rewards because of the increase of the stock market value of the company. This statement is unproven. There is no clear causal connection between the performance of the top executives and the stock market value of the company. Furthermore, the stock market value is determined by a lot of factors. Besides, the stock market value fluctuates from day to day.  In case the focus is on the short-term value of the company, maybe it is a better idea to look at the long-term value of the company in terms of continuity, customer satisfaction and corporate social responsibility.

Critical people are just jealous. This is just the opposite of the reality! A top manager can be satisfied with a premium until a new benchmark research occurs and show a loan of a similar top manager who earns more than he does. In that case, the manager wants to receive a higher loan as well. Why? Just because of jealousy and status.

The FNV thinks that both employees and managers contribute to an organisation, respective to their abilities. In the same line of reasoning, employees and managers should share equally in benefits and concerns. During prosperity, all workers get a relatively comparable pay rise and profit share. The same should occur during bad times, both parties should deal with no or little pay rise. In this case, the top managers are still earning more money due to the complexity and high responsibility of their job. Top managers are supposed to obtain and maintain fair reward ratios between themselves and others working for the company or institution. This should happen instead of comparing themselves to other top managers in the international labour market.

Next to the fixed salary we often observe exorbitant bonuses for top managers while some did not even perform well. The FNV believes that these bonuses should be retained strongly. The bonuses lead to undesirable behaviour; managers are only interested in short-term targets (share price, profit) at the expense of long-term results (customer satisfaction, risk management, quality). We have already observed this kind of behaviour at banks. However, these bonus schemes did not change. Bonuses are impossible to monitor, criteria’s are unclear and individual influence on results are hard to observe. Furthermore, top managers are already paid extremely well for doing their job, there should not be a need to provide them bonuses. The wage earned should be enough motivation to fulfil their job well. In the end they are just employees and in contrast to director-shareholders they have limited risks in case of malfunctioning. The same risks apply for other employees (like resignation).

In favour of fair reward ratios within institutions, the FNV wants to stop these undesirable developments. Of course the jobs are though, challenging and the responsibilities are high, for which a person should compensated. We think a ratio of 1:20 in fixed remuneration in comparison to the fixed remuneration of the lowest paid in the company is fair. The FNV is using this factor 20 as a standard in all market sectors. For this factor, many qualified persons are willing to fulfil the top management job. We would like to see top managers in permanent employment within a collective labour agreement (CLA); their fixed remuneration should be in line with the CLA structure. The valuation of top jobs should be measured with only one way of measuring.

In Dutch (semi-) government sectors, where wages are paid with money of the public, the ‘Wet Normering Topinkomens’ rules. This law makes sure that no top manager in any governmental sector earns more than a minister. The FNV wants to start deducting bonuses schemes to a maximum of 50% on initial wage. In the long run the FNV wants to decrease this amount to an amount of 10%. This would limit the influence of bonuses on undesirable behaviour. Also, the criteria leading to payment of a bonus should meet a few conditions, nothing different than the variable remuneration for the normal personnel. Not only quantitative criteria (efficiency, revenue, share price) but also qualitative criteria. For top managers these criteria should be partially focused on corporate social responsibility: employment development, durability. Furthermore there should be enough evidence of personal influence on the achievements. This would make it impossible for top managers to ‘lift’ on a prosperous market.

Regardless norms and legislation the best thing to happen is that top managers realize the social importance of lowering their wages. This decrease needs to happen in order to bring back fair ratios between them and other employees within the company. The society needs this, referring to the regular fuss around bonus schemes. The only ones left to realize this is the top management themselves.