British Business at risk unless executive rewards linked to long term performance
New report from High Pay Centre warns of obsession with share price and short-term financial performance measures
British companies need to link at least half the performance pay of top executives to broad measures of success, or risk business decline, the High Pay Centre warns today.
In a report published today, the Centre shows that 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. As a result, executives are encouraged to focus on short-termism, cost cutting and the need for quick returns. But CEO pay has trebled to £4.8 million in ten years without any accompanying long-term increase in share values.
The report, Paid to Perform? says that firms are failing to link important areas of non-financial performance that improve long-term success, to CEO pay. It demonstrates how customer satisfaction, employee engagement and public reputation are vital to business’ long term interests; shows the impact of corporate social performance in improving growth prospects in an increasingly globalised economy and argues that, while cost cutting is sometimes justified, developing great products and brands can be the key to long-term sustainability.
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
Paid to Perform? 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.
Paid to Perform? shows how Total Shareholder Return (TSR) is used to calculate at least one element of performance related pay by 74 out of FTSE 100 companies, with 96 companies using 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.
High Pay Centre Director Deborah Hargreaves said: “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.”
The report says a focus on short-term financial measures can encourage executives to increase the share price and profits by cutting costs and investment, or by speculative mergers and acquisitions and share buybacks. However, this can have adverse long-term consequences for companies. Despite the Government’s talk of an export-driven return to growth, the UK boasts fewer Fortune 500 companies than France, Germany and Japan, where executives are under less pressure to deliver short-term returns.
The average length of shareholding in the UK is seven months. The timeframe over which chief executives’ so-called ‘Long-Term’ Incentive Plans are measured is usually three years. It can take much longer than this to build a successful brand, develop a compelling new product or significantly increase the skills and capacity base of a company workforce.
The report shows how longer-term institutional shareholders like the Association of British Insurers and the Local Authority Pension Fund support broader measures of executive performance and says leading businesses like BP, Barclays and HSBC, who have suffered reputational damage, have gone further than others to link top pay to non-financial measures of success.
For more information, contact Luke Hildyard at the High Pay Centre
Since 1 January 2019 the average FTSE 100 CEO has earned:
Income inequality in the UK
Wealth inequality in the UK
- RemCo Reform: Governing successful organisations that benefit everyone
New report from HPC and the CIPD, based on interviews with remuneration committee members, investors and other stakeholders in the pay setting process, calls for corporate governance reform, with more emphasis on people management and employment culture
- It’s ‘Fatcat Friday’ - CEO pay for 2019 surpasses the amount the average UK worker earns all year
HPC and CIPD research illustrates the UK's economic divisions
- Labour’s plan for stakeholder votes on boardroom high pay might just work
HPC Head of Policy and Research Ashley Walsh blogs on a new report commissioned by the Labour Party