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How can performance-related executive pay be made to work better?

A new project by the High Pay Centre, will look at the link between pay and performance. How can variable pay be re-designed to encourage the right sort of executive behaviour? We will explore what exceptional performance means and how to achieve it.

“Getting pay wrong damages popular trust in business and undermines the duty to promote the long-term success of the company,” says business secretary, Vince Cable, in a recent letter to FTSE 100 remuneration committee chairs.

Pay for top executives has nearly doubled to £4.3m in the past decade while workforce wages have seen no real-terms increase. This is often justified by the need to pay talented people for outperforming in their role. But do big pay awards create or reward superior performance?

Again Vince Cable, in his letter says: “In the last year we have seen striking examples of shareholders rising up to protest against pay that neither reflects past performance nor is well calibrated to encourage a decent performance going forwards.”

Too often, performance pay in the form of bonuses and share plans is taken for granted as part of an overall multi-million pound package. For the lucky few, it can be a reward for being in the right place at the right time. 

Rather than drive good corporate performance, variable pay can lead to short-term decision-making that is not beneficial over the longer run. It has also made executive packages so complicated that sometimes the directors themselves do not understand them.

While there are some doubts about whether performance pay can be used to drive the right sort of executive behaviour, it is a system that has become deeply entrenched in the structure of corporate Britain.

The High Pay Centre has long been critical of the structure and use of performance-related pay in the business world. We have now received funding from Lord David Sainsbury to conduct a 9-12-month project on performance pay.

The project will consist of three discrete research elements:
• How did we get here? The evolution of variable pay and the exploration of a link to performance.
• What is exceptional performance in a personal and corporate sense? This will include a poll of Institute of Directors’ members for their views.
• How can performance pay be re-designed? We aim to end up with a simple set of clear guidelines on the use and design of performance pay.

The project is being overseen by a committee of experts: Simon Walker director-general, Institute of Directors, Andrew Smithers, head of Smithers & Co, David Pitt-Watson, executive fellow London Business School, Ruth Bender, reader in corporate financial strategy at Cranfield university, John Plender, senior columnist, Financial Times, and Duncan Brown, principal, Aon Hewitt.

As well as the individual research projects, we are asking for short discussion papers from experts to inform the debate and final outcome. We will also be publishing all of the work on our website and organising several free events to publicise our findings.
For more information on the project, contact

Posted on 27 May 2014

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