EPS and TSR still most accepted metrics for exec pay

Shareholders are continuing to accept the use of earnings per share (EPS) and total shareholder return (TSR) to determine the variable pay of executives, despite the evident mis-alignment over the long-term between pay based on these measures and actual corporate performance. Companies see no problem in using the same financial metric to measure both short and long-term performance, according to research from the High Pay Centre.

Other findings from the Centre’s research into European executive reward are:

• The proportion of companies using a single financial performance measure to determine long-term incentives is higher in Germany than in France or the UK.
• None of the UK companies in the sample disclosed targets for all their variable pay schemes in advance of the relevant shareholder vote. New UK regulations allow pay targets to be withheld and all companies questioned by the High Pay Centre take advantage of this provision.
• Many UK companies choose to disclose more information on future performance measures in the implementation report than in the future policy table, because “the future policy table disclosure is subject to a binding shareholder vote. The implementation table disclosure is not,” the Centre suggests.
• A significant proportion of companies using EPS as a pay performance measure are failing to disclose whether they use an adjusted or statutory measure.

Paul Marsland, the author of the report, concludes:

‘Performance measures are not a substitute for discretion. Superficially there appears to be a chain which links the money received by directors and the work they have done to get it. Despite the appearance of formality, discretion is used at each stage of this chain and subjectivity is involved in the choice of measures and in adjusting away from standard measures and calculating outcomes.

The preference for relative measures not absolute measures amongst UK companies in particular is striking and puts further strain on the already tenuous link between an individual's contribution to corporate performance and the proportion of shareholder funds which are used to reward that individual. Who uses discretion and how, then becomes the issue. Without this explicit disclosure the continued use of performance related pay to reward executives creates the illusion of accountability and for some an irresistable opportunity for personal enrichment.’

‘Metrics Reloaded: Examining executive remuneration performance measures’ was published by the High Pay Centre in June 2015. It is available for download here: http://highpaycentre.org/pubs/the-metrics-re-loade...