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The Metrics Re-Loaded: Examining executive remuneration performance measures

Most big company performance measures in the UK are based on profits and share price - often judging companies relative to others, so that executives can still be rewarded even if shareholders lose out.

The quantum of executive pay has become detached from the average taxpayer's experience. The resulting public anger has been met with regulatory reforms aimed at empowering shareholders to hold boards to account for perceived excess but legislation and shareholders appear tolerant of vague descriptions around performance metrics that may be used in future and bland explanations for why these were chosen.

The current regime allows government to properly claim that it has provided shareholders with appropriate tools to hold boards accountable for executive pay but also allows companies to claim that pay levels are protected from the obvious conflict of interest inherent in directors setting their own pay due to shareholder approval. At the same time, shareholders are not giving explicit approval to the performance measures which inform their view of excess and continue to tolerate levels of pay which are not commensurate with the measures being used by companies.

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.

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Posted on 10 June 2015

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