FAIR PAY
New study on link between executive pay and corporate performance
The drive to link executive pay to performance in publicly listed companies has not been successful. The UK economy has witnessed massive growth in performance-related pay and yet “no such corresponding leap forward” in company performance. That’s the key message to emerge from a new report based on research by Incomes Data Services for the High Pay Commission looking at the link between executive pay and company performance in the FTSE 350.
Since the mid-1990s, there has been a strong drive towards “pay for performance” that has dominated corporate governance culture. This trend has led to “huge increases” in performance-related remuneration for executives. As the report points out: “What passed as a maximum bonus in 2002 is lower than what a director would receive today for meeting basic targets.”
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According to figures gathered by IDS, in the past 10 years, the average annual bonus for FTSE 350 directors went up by 187%, while the average year-end share price declined by 71%. What’s more, this increase in variable pay has not come at the expense of absolute rises in basic salary: over the decade, salary levels have increased 63.9%.
The report says: “All the components of boardroom pay, with the exception of share option gains, increased at a faster rate over the last ten years than corresponding measures of corporate performance." It concludes: “In both good and bad times, the majority of directors continue to receive a performance-related bonus.”
A final word
“Pay for performance has added to the staggering complexity of executive packages and yet there is no clear evidence that it works. Boards need to think again about how to structure their pay awards.” - Deborah Hargreaves, Chair of High Pay Commission.
Want to know more?
Title: "What are we paying for? Exploring executive pay and performance", Discussion paper researched by Incomes Data Services for the High Pay Commission, September 2011.
Availability: You can download the 21-page report in PDF format, free of charge, from the High Pay Commission web site at http://highpaycommission.co.uk/facts-and-figures/.
The High Pay Commission is an independent inquiry into top pay in the private sector. It will look at the reasons for the gap between high and low pay in the UK in recent years and why this matters. For more details visit http://highpaycommission.co.uk.