Major inquiry by the High Pay Centre concludes that performance-related pay is failing on its own terms
A major new report published today by the High Pay Centre think-tank has called for wide-ranging reforms to performance-related executive pay. The report is the result of a year-long inquiry conducted by a committee of independent experts from business, academia and the media.
The report argues for the abolition of so-called ‘Long-term Incentive Plans’ (LTIPs), claiming they have driven up executive pay to unwarranted levels without delivering a corresponding increase in company performance.
Research for the High Pay Centre suggests that LTIP payments to FTSE 350 Directors increased by over 250 per cent between 2000 and 2013, roughly five times as fast as returns to shareholders. The report found a negligible link between LTIP payments to executives and shareholder returns.
The Committee warns that evidence that performance-related pay induces better performance from executives is weak and that targets based on company profits or share price can create perverse incentives that are damaging to businesses and the wider economy in the long-term.
The criticisms from Committee members, including Institute of Directors (IoD) director-general, Simon Walker, and former fund manager , David Pitt-Watson, will create growing pressure for reform of executive pay practices. A survey of IoD members earlier this year found that 52 per cent believed that anger over excessive executive pay was the biggest threat to public trust in business. Significant shareholder votes against executive pay have already occurred this year at companies including Ladbrokes, Centrica and BG Group.
High Pay Centre founding director, Deborah Hargreaves, said: Performance-related pay has failed on its own terms. It doesn’t encourage or reward good business performance. The only effect it has is to make executive pay packages more complex, less aligned with the interests of the company and much, much bigger.
This has become a real threat to public trust in business. Too often what ought to be good news stories about organisations employing thousands of people and generating healthy profits, are undermined by provocative and disproportionate pay packages to just one or two individuals at the top.
The report also argues that:
- Annual bonus payments should be made in cash, not shares, to prevent executives from benefiting from sudden increases in the share price caused by external factors such as a takeover bid
- So-called ‘golden hello’ payments to entice external executives should not be offered unless the position has been advertised as part of an open recruitment process
- The ‘remuneration committees’ that set executive pay should be diversified, to ensure committee membership reflects a wider range of professional backgrounds.