'Negligible' link between executive pay and firm's performance, says study

The link between executive pay and company performance is “negligible”, according to a study that will fuel arguments for reform of corporate wage packets.

The chief executives of Britain’s leading 350 companies each took home a median pay package of £1.9m in 2014, a rise of 82% on 13 years ago, research commissioned by the UK arm of the CFA Institute, the global association of investment professionals, found.

But the rise was not mirrored in the fortunes of their employers, with return on invested capital – the report’s preferred measure of performance – up by less than 1%.

The authors of the report said: “Our findings suggest a material disconnect between pay and fundamental value generation.”

The study of businesses listed on the FTSE 350 by Lancaster University Management School found that the increase in pay since 2003 was largely down to performance-related bonuses. This was despite the fact that “the median FTSE 350 company generated little in the way of a meaningful economic profit over the period 2003-2014,” it said.

The report warned that measures typically used by companies to calculate performance, such as total shareholder return and earning per share growth, placed too much emphasis on “short-term” results. The CFA UK chief executive, Will Goodhart, said: “Too few of today’s popular approaches [...] genuinely align senior executives’ pay with the economic value that they create.”

A green paper published by the government last month signalled that companies could be forced to give shareholders more power over executive remuneration, such as a binding vote at businesses where directors have faced “significant opposition” to their pay deals.

Companies could also be told to publish their pay ratio – the difference between the wage packet of their best-rewarded member of staff and the least well paid.

But the proposals were watered down from Theresa May’s comments after becoming prime minister in July, when she suggested executives should be subject to an annual, binding vote on their remuneration.

Stefan Stern, the director of the High Pay Centre, welcomed the report, saying companies placed too much emphasis on suspect measures of performance.

“It’s very hard to measure performance intelligently because share prices move for all sorts of reasons beyond the control of the chief executive or senior management,” he said.

“[Excess pay] is an error based on a false premise that you can construct some sophisticated formula that will link performance to pay. We just want firms to exercise a discretion that is lacking.

“They’ve fallen back on intricate and elaborate contracts to do the job they should be doing themselves, which is to exercise judgment.”

Large pay packets were often about making sure executives do not move to another company, rather than a measure of their efficacy, Stern said. Theresa May has ruled out forcing companies to put a worker on their boards, as happens in Germany.

But Stern said she could still decide to mandate worker representation on the pay committees that decide executive rewards. “Without the voice of ordinary people, it’s harder to ground the conversation in reality,” he said.

Powered by Guardian.co.ukThis article was written by Rob Davies, for theguardian.com on Tuesday 27th December 2016 17.56 Europe/Londonguardian.co.uk © Guardian News and Media Limited 2010

 

JefferiesAnd the Best Place to Work in the global financial markets 2018 is...

Register for HITC Business News