A new report published by the High Pay Centre think-tank has concluded that attempts to link the pay of Britain’s leading company executives to their company’s performance are not working, with median earnings of FTSE 350 directors increasing more than twice as fast as median pre-tax profits since 2000, and four times as fast as the median market value of FTSE 350 companies.
The research is the first stage of a wider project examining how to ensure executive pay genuinely rewards top performance and incentivises behaviour that is aligned with the UK’s wider economic interest. It concludes that in today’s UK boardrooms, executive remuneration policy is dominated by a pay for performance culture, with as little as a fifth of a top director’s annual earnings paid as salary and the remainder made up of various incentive awards.
The High Pay Centre report analyses pay data for FTSE 350 directors, and key company performance metrics such as pre-tax profit and earnings per share between 2000 and 2013. The analysis showed that directors’ median total earnings increased by 232% between 2000 and 2013 compared to a much smaller increase in median pre-tax profits of 95%.
There was little correlation between variable elements of directors’ pay and the corporate performance measures most commonly used to determine pay. For example, while more than half of all bonus awards are linked to some form of profitability target, median bonus payments for directors increased more than three times as much as median pre-tax profit in FTSE 350 companies between 2000 – 2013.
Long-Term Incentive Plans (LTIPs) fare no better, with the report finding no noticeable link between the relative ranking of LTIP share awards and the relative ranking of changes in either total shareholder return (calculated using share price changes and dividend payments) or earnings per share over the 13-year period. Nearly all LTIPs are based on one or other, or a combination, of these two measures, so the apparent lack of any correlation here is surprising.
The report also highlights the growing pay gap between executives and other employees, with FTSE 350 directors’ pay growing nearly twice as fast as pay for all full-time UK workers. This is part of a wider theme for the High Pay Centre, which points to the role it believes executive pay has in the widening gap between the richest and the poorest in the UK, and a growing acceptance of the idea that a more unequal society is not only unfair, but also less economically effective as a whole.
The report traces the acceleration in executive pay back to the abolition of the very high marginal rates of income tax by the incoming conservative government in 1979. It also explains how corporate governance reforms in the nineties established the key principles of shareholder accountability, pay transparency and the need for non-executive decision-makers that still underpin the government’s approach to executive pay today. It makes interesting reading, and can be found on the High Pay Centre’s website.
To find out more about how thinking on executive pay is evolving, contact Andrew Menhennet at Yellow Hat (Andrew.firstname.lastname@example.org).