Differing Reward Systems and their Consequences

The debate over whether entrepreneurs/owners should be rewarded at multiples that exceed those for the rank and file employees has been raging for some time now. What has added fuel to the fire in recent years has been the issue of executive compensation and shareholder rewards when compared to the reward systems for the ordinary workers and employees.

The ongoing global economic crisis has been blamed on too many rewards for the bankers and the CEO’s that exceeded the benefits paid to the lowest paid worker by multiples that were too high.

For instance, it was reported that the CEO of the famous American retailer, Wal Mart, was taking home a compensation that was 150 times higher than the lowest paid worker was. Naturally, this became a bone of contention as many argued that the contributions of the top management though exemplary could not have been so stupendous that they had to be paid such stratospheric amounts.

Further, it was also argued that the high levels of rewards for the top management incentivized them to take more risk than their organizations could take as the rewards were directly linked to the kind and the type of risk that they were taking in the hope of better returns.

Some Thoughts on Why Entrepreneurs are Different

The other aspect about differing reward systems is the skewed system in place that accords entrepreneurs and owners of companies more money than the rank and file employees do.

For instance, it is common in many companies for the entrepreneurs and the owners to hold large amounts of equity or stocks that establish their majority ownership in the companies. This means that they are being rewarded more than the rank and file employees who though given stock options do not have the kind of rewards that the entrepreneurs and the owners have. The proponents of this line of argument take the stance that entrepreneurs and owners are taking more risk than the employees are as success and failure of the companies directly impacts their rewards.

For instance, entrepreneurs and owners put their own money or raise capital taking more risk and any failure of the company would directly impact their holdings and their capital. On the other hand, the employees do not lose any money because of their non-performance or the failure of the companies. This is the most common reason that has been advanced for the differing reward systems for entrepreneurs/owners and employees.

Some Perspective on Managerial Reward Systems

It needs to be mentioned that reward systems for the top management and entrepreneurs when compared to the employees are two different aspects.

While nobody faults the entrepreneurs and the owners for being paid more or getting more returns for their investment as they take more risk, the issue of managerial pay being disproportionately higher than the employees is certainly a cause for concern. This is because the incentive system that encourages managers to take unwarranted risk because they are being rewarded creates perverse incentives for them to play around with the fortunes of the companies. This is precisely what happened in the run up to the global financial crisis as the bankers were being incentivized to take more risk.

Apart from that, basic employment relations theory states that whenever the rank and file employees are being paid peanuts when compared to the managers and the top management, the net result is alienation and disaffection among them.

Therefore, the argument being made here is that appropriate reward systems must be designed keeping in mind the interests of everyone and not only the top management or the middle management.

Concluding Thoughts

Finally, greed in any form is good as long as it is within limits and once unlimited greed becomes the norm, it destroys the very fabric of society and business and the clear implications of differing reward systems are that there has to be a check on executive compensation as well as some measures that would reward the entrepreneurs and the owners fairly without creating a big gap between them and the employees.