THE BLOG

Pay Contests Are About Status, Not Talent

13/03/2014 11:00 GMT | Updated 12/05/2014 10:59 BST

To get good people, you must pay competitive salaries. That's the argument of boards and compensation committees across the company. But it isn't true.

Charles Munger, vice chairman of Berkshire Hathaway and the business partner of Warren Buffett, has argued just the opposite. "People should take way less than they're worth when they're favoured by life," he says, further arguing that when you have risen high enough, you have a "moral duty to be underpaid - not to get all you can, but to actually be underpaid."

The board of Barclays, the Co-op and companies across the country should take note. The competition over pay has nothing to do with talent.

By demonstration, Munger pointed out that the CEO of Costco - the second largest retailer in the U.S. - quite radically underpaid its CEO, when compared to the pay of the CEOs of Walmart, Home Depot and Target. Munger similarly argues that company directors - typically people who are already successful - should not expect high pay for their service. And it's striking that Berkshire Hathaway itself pays its directors $900 for each meeting attended in person and just $300 for those who simply call in.

Munger is very clear that the fate of the company and its leadership should be tightly coupled. Romans, he argued, had to stand under the bridges they built as the scaffolding was being removed. Similarly, no one should build a company and be able to walk away, their fortune intact regardless of what happened next.

The old argument that pay must be competitive implies that, in a global market place for talent, you can't get great people without high pay. But Munger demonstrates what we all know: that this isn't true. In fact, the opposite is true: if you expect people to work for money, then that's all they're working for. And that is never good enough.

We know this. Euan Sutherland as much as confessed it when he complained that details of his pay were leaked. Why would he mind the leak if he weren't implicitly ashamed that he flourished even as the Co-op struggled? The competition for high pay isn't about a market for talent; it's about a contest for status and importance: my pay's bigger than your pay. That's why transparency has made pay more problematic than ever; accepting less than your peers looks like failure in the business pecking order.

Buffett and Munger are quite fond of understatement and they both clearly enjoy an absence of flash. They're secure in their success and confident enough of their own talent that they don't need stratospheric pay packets to prove it. Mike Darrington, the former boss of Greggs has a similar style. His pay was modest compared to his peers and he's been a consistent critic of lavish pay. They all call the bluff of compensation committees too weak and often themselves too greedy to say 'no'. Let's call this what it is - a contest for status - and give up pretending it has anything to do with business.