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The 2007 Skoll World Forum. The thorny issue of CEO pay

Rod Schwartz
Rod Schwartz, posted on 30.03.07

Blog comments4 comments


I had the privilege of attending, for the second time, the Skoll World Forum on Social Entrepreneurship, in Oxford, from which I've just returned. The conference has emerged as the world"s pre-eminent gathering of social entrepreneurs.

A variety of interesting and thought-provoking issues emerged, each of which would justify its own posting. One of the most fascinating to me, and it came up at several sessions, was that of pay. In short, what social enterprise chief executives can or should pay themselves. Putting aside financial constraints, there appears to be a big question around the moral issues regarding the level of remuneration that can be justified for enterprises that claim to operate along social lines.

A CEO of one business asks how much is appropriate for her to be paid. Another social enterprise founder mentions the fact that a key staff member earns A$100,000, prompting loud groans and rolling eyes of those in attendance. (It subsequently transpires that this employee subsequently leaves for twice the money to the private sector.)

I have seen this issue surface recently outside of Skoll as well. I know a firm, which has been started by two high paid (but not independently wealthy) media executives. In their case, they are vital to make the enterprise succeed, but feel queasy to pay themselves even one third of their private sector pay packets. The business will not succeed without the skills they "bring to the table"?, but their families depend upon their earnings to bring sustenance to their family "table" as well. Another CEO pays himself a derisory salary as chief executive, even below charitable sector standards. Yet his competitors at other firms perform the same role on a voluntary basis. For this, the chief executive has come under criticism.

While I sympathize with those who feel private sector executive pay has gotten out of hand and concur with the view that social enterprise CEOs can not be mercenary in their approach to their own compensation, I think this has gone too far. Furthermore, the unwillingness to pay close to competitive wages is puritanical and short-sighted. It will inevitably lead to slower growth for social enterprises and social businesses, and cause a long delay in bringing forth the substantial social returns they can generate. It is simply a fact of life in our system that certain skills are vital to the success of fast growing businesses, and in many cases these skills are high-priced. Moreover, not everybody in an organization has the dedication or the family circumstances to carry on in the social enterprise irrespective of financial reward. I think it's vital that as the social sector matures it also "grows up" with respect to this issue of pay. Failure to do so will be like cutting off its nose to spite its face.

Rod Schwartz


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4 comments so far.


Blog comments Paul, 18.04.07, 16:34

The issue of pay is an intriguing one, and my guess, one that will be used as a litmus test (improperly) both ways. Eg, those from the traditional non-profits will view it as bad to pay someone "too much"?, while some of the newer philanthropists will view it as bad to pay someone "too little"?.

We have tried a few things at Envirofit. First, we pay people "lowest quartile" of market (but not for non-profits; we look at other engineering product companies). We have pretty generous benefits for a start up (health insurance). In the Philippines, it is the same theory- market pay. Obviously, a young engineer there doesn"t make the same amount as in US. But, they understand the philosophy and that it is being applied consistently.

So far, it sounds like we are just cheap, right? Well, on top of this, they have a bonus opportunity, based on meeting business objectives that can be close to 20% of pay. And, as the company grows, their pay scale adjusts as well. Same deal for the leader of the organization.

The third leg on pay is that WHEN we begin to produce operating profits, the starting assumption will be that the FIRST use of this we will adjust pay to the top quartile for similar firms. I am not sure what will happen to pay when this happens. I think there is some chance that they will elect not to go to this higher pay level, because they will want to use some of those surpluses for other business opportunities, just like many entrepreneurs do when their companies become profitable. But that remains to be seen.

What we are trying to do is borrow some incentives from the venture backed company model to make up for the fact that we can"t give Envirofit employees shares in the company.

Your post points out the tip of an iceberg (or the elephant in the room?) for this sector" funders are going to have to get used to the idea of paying people to build these entities. If Envirofit is successful, its revenues could exceed $10s of millions $Us in a few years. Someone isn"t likely to do build such a venture for a 5 figure salary, at least not with a frequency that will make this sector attractive to the best and brightest.


Blog comments Tim Curtis, 16.05.07, 16:11

I thought that the princple of the lowest paid person receiving no less than 40% of the highest paid person was a good working approach. And a lot of work has been done on what constitutes a living wage, rather than just leaving it to the market


Blog comments Rod, 23.05.07, 15:32

Tim

Thanks for your post. I am afraid I have to disagree. Clearly, the current situation with large corporates, where the CEO makes 400 times what the lowest paid workers earns, feels rather unfair to me. On the other hand, your proposal that the CEO of a social business can only earn two and a half times what the lowest paid staff member takes home, seems impractical to me. In a competitive marketplace it either insures that you cannot have a talented CEO, who is seeking a market wage for managing a growing, prosperous social business, or that you will operate in a relatively uneconomic fashion. This is because the CEO, if paid in line with market circumstances will drag all other staff members up to a level which will not be sustainable (e.g a CEO earning £100,000 will ensure that all staf are paid a minimum of £40,000). Where we probably differ is that I am prepared, in such circumstances, to leave compensation to the market. I appreciate your comment that, "a lot of work has been done on what constitutes a living wage", but the practical realities are that such a setup will not work. Any firm which adheres to this rule will not succeed, in my judgment.

Rod Schwartz


Blog comments IFRS Specialist, 17.08.11, 12:22

You're motivating me so much I have to leave now, just like when I read, "If we were logical the future would be bleak indeed. But we are more than logical. We are human beings and we have faith and we have hope..".


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