The people who want to get rid of employment protection will try anything. Unfair dismissal legislation has been blamed for stifling economic growth and preventing efficiency improvements in the public sector. All baloney, of course. Now, though, City AM’s Allister Heath says it’s stopping shareholders from getting rid of under-performing senior executives. He has a five point plan for tackling excessive boardroom pay. Here is point 4:
The fourth change required is that we need simple contracts that allow CEOs to be fired for breaching performance targets without a pay-off (which means changing the law on unfair dismissals).
No it doesn’t! Chief executives are subject to the same employment laws as everyone else. Employee’s who don’t perform can be sacked, however high and mighty they are. There is nothing to stop boards giving senior executives a couple of warnings and then sacking them if there is no improvement, it’s just that, for the most part, they don’t.
This has nothing to do with the law, it is simply convention. When executives get beyond a certain level, some things are beneath their dignity, especially things which call into question any aspects of their capability. They don’t do assessment centres any more. They don’t attend management development courses, they have one-to-one coaching instead. And they don’t get formal warnings from their bosses.
It has therefore become the norm to pay underperforming senior executives off. The sums are usually way in excess of anything the employer would be legally obliged to pay. I have known senior managers paid off after less than a year’s service, who would therefore have no legal right to bring an unfair dismissal case. Even if a sacked chief executive could prove he was unfairly dismissed, the most he would get would be around £80k. Executive payoffs in large companies are usually significantly higher than that.
So why has the convention become established? It’s here that the people-like-us factor and the there-but-for-the-grace-of-God factor kick in. The people most likely to be issuing the warnings or doing the dismissing are often in, or recently retired from, similar roles in other companies. They therefore treat each other as they would like to be treated themselves.
People Like Us don’t get formal warnings, we have quiet words with each other. People Like Us don’t get sacked, we come to mutual agreements. And People Like Us don’t make a fuss in public with employment law cases. Our colleagues give us a big enough payoff to make sure we don’t need to. The further up the organisational hierarchy you go, the closer you get to being People Like Us and, therefore, the less likely you are to be sacked in the conventional way.
All of this is due to social convention. True, some of the payoffs given to senior executives may have legal force but that will be because of contractual obligations rather than anything laid down by legislation; terms negotiated under what Allister Heath calls the “absolutely essential freedom of contract”. And why do employers agree to be bound by such contracts? Again, it’s convention. No ordinary mortals would get away with writing such terms into their employment deals.
There are many reasons why senior executive pay has risen at such a rate, why it continues to outstrip company performance and why executives are paid off handsomely even after dismal failures. Shareholder inaction, cronyism and social convention all play their parts. But none of this can be blamed on employment protection legislation. The law does not stop companies from firing under-performing managers nor does it insist that they should have high severance payments when they go. Whatever changes are needed to prevent bosses being rewarded for failure, the removal of unfair dismissal laws is not one of them.