Homepage Education Events Research Resources Executive Pay
Show News
  1. Home
  2. News
  3. Businesses urged to link executive rewards to long-term performance: High Pay Centre

Businesses urged to link executive rewards to long-term performance: High Pay Centre

EXECUTIVE REMUNERATION

Businesses urged to link executive rewards to long-term performance: High Pay Centre

British companies need to link at least half the performance pay of their senior executives to broad measures of success, or risk business decline, the High Pay Centre warns today.

According to the High Pay Centre, executive pay packages across the FTSE 100 are overwhelmingly linked to short-term financial measures of corporate performance such as earnings and share price movement. This encourages executives to focus on “short-termism, cost cutting and the need for quick returns”. But CEO pay has trebled in the last ten years without any accompanying long-term increase in share values.

%ADVERT%

Entitled “Paid to Perform?”, the report says that all too often firms fail to forge a link to important areas of non-financial performance that improve long-term success, to CEO pay. The report demonstrates how customer satisfaction, employee engagement and public reputation are vital to business’ long-term interests.

Key recommendations

The High Pay Centre warns that “company priorities, as reflected in executive pay incentives, must reflect a longer term outlook, or British businesses will suffer in the face of overseas competitors with more sustainable business models”.

It calls for:

  • Businesses to link at least half of chief executives’ performance-related pay to non-financial yardsticks.
  • Introduction of mandatory reporting on social and environmental performance.
  • New tax and procurement incentives to encourage companies to focus on wider measures of performance.
  • Requirements for pension fund trustees, investment managers and commercial pension providers to take into account the social/environmental impact of their investments on beneficiaries.
  • Employee representatives on company boards, to challenge decisions based on short-term financial considerations that may jeopardise the company in the long-term.

Existing performance measures

An analysis of annual reports by the High pay Centre finds:

  • Total shareholder return (TSR) is used to calculate at least one element of performance-related pay by 74 out of FTSE 100 companies.
  • 96 companies use either TSR or earnings per share, or a combination of both to determine performance for their chief executives’ long-term incentive plan.
  • Most companies pay little or no regard to the long-term benefits of non-financial performance across areas like employee engagement, corporate social responsibility and customer satisfaction.

A final word

“British business will erode its competitive edge even further if it doesn’t start looking beyond share prices and reward executives for their success in fundamental areas of non-financial performance. We’ve got to start taking a longer term view and that means persuading business that performance in areas like corporate social responsibility, employee engagement and customer satisfaction rates are the key to lasting business success.” - Deborah Hargreaves, Director, High Pay Centre.

Want to know more?

Title: Paid to Perform?, High Pay Centre, January 2013.

Availability: You can download the report in PDF format, free of charge, from the High Pay Centre web site.

The High Pay Centre is an "independent non-party think tank established to monitor pay at the top of the income distribution and set out a road map towards better business and economic success." It says: "We aim to produce high quality research and develop a greater understanding of top rewards, company accountability and business performance. We will communicate evidence for change to policymakers, companies and other interested parties to build a consensus for business renewal." For more information visit www.highpaycentre.org.