The plea by Julia Hoggett, CEO of the London Stock Exchange (LSE), for increased pay as a way of attracting world-class talent to lead British companies is misplaced on several fronts.

Financial reward is just one consideration when it comes to stimulating organisational performance. Another, arguably more important, issue is ‘fitting into the new context’.

The frequent question—‘Why do British companies pay less than American organisations?’—ignores key, structural differences between the two countries.

The United States is a much larger integrated market than the UK. In contrast to the EU, the US also has an amalgamated banking system. The equivalent of US support for business is still a distant dream for both the EU and UK, and inward investment in the US outstrips both.

Money for growth migrates west and, year-on-year, the US is the only visible beneficiary.

A well-handled CEO transition

How can we make sense of this enormous differentiation? A good start is to examine the ‘micro context’, or the individual organisation itself. How long does a newly appointed CEO take to be as ‘good’ as they are perceived on their first day?

Our research into this topic has discovered that CEO relearning following a job change requires some 18 to 24 months. Many CEOs are not in the same job two years later, often because of their poorly handled transition.

Working through such a change involves coming to terms with the culture(s), character, values and legacy of the firm recently joined.

A typical misjudgment made by the new CEO is to try and make an immediate impact by redesigning structures and systems, only to later discover this process started with a misdiagnosis. The structure problem was in fact a people problem, involving misaligned interests and divided management.

The new chief executive’s act of bringing in expensive consultants to fix a challenge that didn’t exist results in the CEO’s credibility plummeting.

Governance is the key

Julia Hoggett’s position is seriously challenged by the Capital Markets Industry Task Force (CMIT), which essentially says that strengthening the entity’s governance is far preferable to increasing remuneration, particularly when it comes to enhancing performance and organisational loyalty.

CMIT’s argument is that only through governance excellence can higher CEO remuneration positively impact personal and organisational performance.

At the same time, CMIT projects a distinct compliance tone to its recommendations. Greater accountability towards investors, transparent voting, and more attention to compliance and explanation are admirable goals, but insufficient solutions.

The Kakabadse Global Studies on board oversight and stewardship surface three important trends:

1. 34 per cent of boards and C-suites are continually divided on the organisation’s mission, vision and strategy;

2. 100 per cent of senior management and board members know very well what is happening in the organisation and what to do to reduce the severity and impact of the challenges they face;

3. 67 per cent of top management and board members do not raise ‘uncomfortable concerns’ because of their discomfort doing so, knowing full well the damaging consequences of their inaction.

Tensions at the top of the organisation are normal, so effective stewardship of the C-suite and board is a fundamental part of growing a performance-oriented culture. One element of this is rewarding the CEO.

Manchester United Football Club is a case in point. The reserved, but strategically brilliant former chair of the club, Professor Roland Smith, had an interesting background. He was formerly chair of both British Aerospace and Harrods, and a past professor of marketing at Manchester University.

He spawned the performance-oriented culture that led to the appointment of (now Sir) Alex Ferguson as Manchester United’s manager in the 1980s. The club’s success for more than two decades is now legendary.

As chair of the PLC board, Smith encouraged the philosophy of quality, on and off the field. Top level football was matched by new income streams that guaranteed the future of the club.

With his and Alex Ferguson’s retirement, successive regimes have been unable to replicate comparable performance standards, irrespective of the remuneration given to their world-class managers and star players. Managers have been sacked after a year or so at possibly the lowest point in their transition.

Striking a balance

The stewardship of top-level executive dynamics is the key here. Clearly, pay attracts high-level candidates, but once they are through the door, it’s crucial these individuals work through a learning curve, building credibility and nurturing a unique performance dynamic.

All of this relies on powerful strategic insight and sensitive stewardship.

Beyond CEO remuneration, it is the appointment and remuneration of the chair of the board and non-executive directors (NEDs) that makes the real difference.

The chair must find the right balance between executive pay and bringing the very best out of the CEO to determine a successful organisation.

Transparency and fairness

Furthermore, the board needs to adopt transparent and fair compensation practices that align with the organisation’s values to achieve this balance. Considerations for chairs include:

• Implement performance-linked executive compensation to ensure top executives are rewarded based on the company’s actual performance. This aligns their interests with those of shareholders and also fosters a culture of accountability.

• Acknowledge the importance of NEDs by establishing fair compensation structures to consider the time, expertise and commitment required for effective governance. This motivates NEDs to actively contribute to the company’s success.

• Establish transparency in governance practice to build trust among shareholders and stakeholders. Companies should disclose compensation policies, detailing how executives and NEDs are remunerated, and actively engage with shareholders to address any concerns.

• Include long-term incentives in executive pay packages to encourage a focus on sustainable growth, rather than short-term gain. This aligns executives with the company’s strategic goals and promotes stability.

• Conduct periodic reviews of compensation structures to ensure the company remains competitive. Adaptability is crucial in positively responding to changes in market dynamics and retaining top talent.

The chair’s holistic approach to enhancing executive and NED contribution needs to incorporate fair and transparent compensation. Incentives can then be aligned with long-term success, which in turn fosters loyalty.

The antithesis of this is the apparent Manchester United solution—ever-higher remuneration in return for diminishing club performance. Identifying and rewarding stewardship-minded chairs sets the basis for future CEO success.

Andrew Kakabadse is professor of governance and leadership, and Nada Kakabadse is professor of policy, governance and ethics, both at Henley Business School.