While many businesses turn to remuneration committees or the board of directors to decide the salary of the chief executive, Henry Stewart, CEO of IT consultancy Happy, has handed over this power to his staff. For the past two years, Stewart has let his 22 employees vote on his annual pay rise.
The business already had a transparent salary policy, where staff submit a proposal for their pay each year that takes into account what they’ve achieved and how they’ve contributed to the values of the organisation over the previous 12 months. These are used to determine pay rises.
And in 2020, Stewart decided to submit his own proposal that staff would judge, complete with a potential pay rise range. “It was slightly scary,” he admits. “I did wonder whether people would feel I shouldn’t be getting paid as much as I am, because my salary is the highest in the organisation.”
Luckily for Stewart, the employees accepted his proposal. Following a similar process this year, his pay went up by 5.8%, on top of a company-wide inflationary pay rise of 10.1%. During the anonymous voting process, 12 people accepted Stewart’s suggested raise, five thought it should be less and five thought he should earn more.
Should more CEOs give staff a say on pay?
Stewart was first inspired to try out this novel approach to remuneration after reading about the pay disparity between bosses and employees at the UK’s largest corporations. According to a report from the High Pay Centre think tank, the median pay of FTSE 100 chief executives was 109 times that of the median full-time worker in 2020.
“There is a huge difference between CEO salaries and standard salaries,” says Stewart, whose own salary is 2.8 times that of the lowest paid person at Happy. “I wondered how this would change if every CEO allowed their staff to set their salaries. It would certainly decide who was doing well in their role and who wasn’t.”
Stewart believes the fact that employees are generally excluded from these decisions is part of the reason that the pay of bosses has increased at a much faster rate than that of the average employee.
“Businesses turn to a board or committee to decide their salary and these tend to be comprised of people on similarly high wages,” he says. “Salary consultancies may also be used to help reach a decision but this only leads to the amount the CEO is paid racking up.”
Some companies, particularly those in Germany, have employee representatives on the board of directors. Stewart suggests that this could be a positive first step for those CEOs who aren’t yet prepared to entrust their staff with deciding their raise.
“The first step, if you don’t want to go wholeheartedly towards having employees set your salary, would be to find out how they feel the CEO is doing,” he adds. “At the moment, it’s decided in isolation and there’s very little relationship between how much CEOs get paid and the performance of the business.”
Stewart has also encountered people that have questioned whether employees understand the role of the chief executive and, as such, would be unable to determine how much they’re worth. “If this is the case, then the CEO should do a better job of explaining what they do,” he retorts. “They only won’t understand if the CEO isn’t present and isn’t impacting upon their people.”
Making this change to the way the boss’s pay is decided has contributed to creating a trusting culture at Happy. Stewart believes his staff feel more empowered as a result. He adds: “We want employees to have ownership of the company and that if you have that kind of environment then staff will show responsibility. Our people have full trust and freedom to make their own decisions.”
Happy’s revenue grew 40% last year, meaning that everyone at the company had a pay increase. Although this likely contributed to people’s willingness to approve Stewart’s own pay rise, he says that he would be willing to follow the same process if the business had a less successful year.
“If I’d got something wrong and people were saying I made no contribution to the business, then it would raise the question of whether I should carry on as leader of the company,” he says. “They could suggest a negative figure, but nobody has so far.”
While there will be a reluctance from many bosses to follow Stewart’s lead, his message to other CEOs is to “go for it”. “I would recommend it to any CEO who thinks they do a good job for their company, because you’ll get a really valuable response from your people,” he adds. “Your employees need to have a good understanding of the finances of the business and you have to have an open salary policy. But as long as you have all those in place, then it can do great things for your culture.”
This article is part of our Going Against the Grain series, which tells the stories of companies bold enough to break business norms and try out new ideas. To explore the rest of the series, head here.