Long-term pay plans should be abolished, according to a UK think-tank which argues the arrangements have driven up executive pay to “unwarranted” levels without a corresponding increase in performance.
The High Pay Centre makes the claim after a year-long study. The centre’s founding director, Deborah Hargreaves, said: “Performance-related pay has failed on its own terms. It does not 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 centre also argues for bonuses to be in cash, not shares; remuneration committees should be diversified to reflect a wider range of professional backgrounds and “golden hellos” should be only paid if a position has been advertised as part of an open recruitment process.
Among the other recommendations are that CEOs should be focused on a broader range of company specific targets “with an emphasis on productivity”.
“Productivity is probably the best proxy from the national interest, given that it reflects an efficient, profitable business that invests judiciously. If performance-related pay is to continue, ways to popularise the publication of productivity figures—both for company’s UK operations and their global business—should be further explored,” the report says.
The make-up of the remuneration committees also comes under scrutiny in the report, which insists they should be more diverse. The concern is that committees are populated by other company executives.
“The notion that executive pay practices represent the market rate for the individuals in question is fatally undermined by the indirect conflicts of interest and limited perspectives hindering the judgement of remuneration committee members who are themselves company directors. A broader range of age, gender, ethnicity and—crucially—professional background should be encouraged. Boards and remuneration committees constituted in this way already operate successfully in many European countries.”