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As the UK entered a cost of living crisis in recent months, private equity headhunter Sita Kolossa had a surreal conversation with a client about his salary. “He told me £1mn was not enough,” she said, sounding aghast, noting that this figure excluded his bonus. “I mean, what do I even do with that?”.

While the private equity industry is a particular beast where even £1mn may be considered mere pennies for some executives (Blackstone chief executive Steve Schwarzman took home $1.1bn in income in 2021), the incident highlighted an issue facing many chief executives: how do you manage the pay and expectations of the highest earners?

The problem is especially acute at a time when the cost of living is escalating and companies are prioritising making life easier for those with the lowest salaries. With many UK public sector workers taking strike action this winter, after years of effective pay cuts, an easy response may be to tell the highest earners to get a grip.

Yet bosses say they are facing a real dilemma.

Their highest earners are often the most senior people, the biggest revenue generators and longest serving employees, who have helped foster growth at companies for years. They are demanding even greater pay. Tight labour markets and a rush to secure top talent have helped their cause, as managers calculate that finding new people to replace senior staff with institutional knowledge would only cost more money and take more time.

An endless pot of cash could placate everyone. Reality means making compromises. So what should a manager keep in mind when dealing with their highest earners?

The first point is that some of the highest paid individuals probably do deserve pay rises. Those associated with the long-term growth of the company are important and need to be recognised as such. Martin Reeves, chair of the BCG Henderson Institute, a think-tank linked to the consultancy, researched business resilience by looking at the competitive performance of all public companies across a 50-year period.

In periods of turbulence, particularly as recessionary pressures take hold, there might be a bias towards having a short-term focus and penny pinching. But competitive gains, Reeves says, come from those companies who turn attention to the next set of growth priorities. And while not every high earner is essential, companies must protect those individuals associated with its future growth through “active retention measures”, says Reeves, which can include remuneration. This could take the form of one-off bonuses, a higher salary, long-term incentive plans and other ways to financially reward staff.

The second point is that retaining high earners is not always about the money. CEOs can be more imaginative and use other levers available to show a person’s value. Individual recognition can come in many forms — a bigger role, a seat at the decision-making table or a clearer career path forward. A positive company culture and attractive working conditions should be another way to entice colleagues. Uniting behind a shared company vision, more flexible working arrangements and greater ownership over one’s own time are perks that money can’t buy.

But don’t then shoot yourself in the foot by doing stupid things. Outsized payouts at the top when a company has cut jobs elsewhere, made huge losses, or embroiled itself in a scandal — or if there is very little leeway to help those at the lowest end of the pay structure — will mean senior managers automatically become a target of worker ire and negative press.

Finally, pay attention to the differential between the highest and lowest paid. While the pay of chief executives always seems to be in focus, in this environment the top band of earners should all watch out. This is a reflection of corporate culture and it affects the motivation of a significant part of the workforce, says Georg Wernicke, who conducts research on strategy and business policy at HEC Paris business school.

“You want to pay the highest earners a sufficient amount to incentivise them to steer the company through difficult times but also enough that you can retain them as staff. But you’ll also be pressured by unions, the public, and the media to pay them something that’s fair, particularly if you’re cutting the workforce,” he said.

As workers push for greater transparency on pay, the issue of the differential will only become more important. Wernicke added: “There is room for the top earners to be humble.”

If an executive team is highly motivated by pay, chances are business leaders and boards will always be battling that frontier and it could be something innate to the culture of a particular company. If it is no longer working, it is something that needs to be dealt with structurally and change has to start at the top.

anjli.raval@ft.com

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