Remuneration Policies ‘Herd Like’

Tuesday, December 13, 2011 Print Email

Chief executive pay packets have gone up by 1200% in the last 25 years and represent a ‘potential time bomb’ according to research by the University of Exeter Business School.

A long running study of directors at leading companies conducted by Annie Pye, Professor of Leadership Studies, shows that the average annual salary for a chief executive of a FTSE 100 listed company has gone up from £150,000 in 1987 to £4m million today.

Her report concludes that boards exhibit ‘herd-like’ behaviour in setting remuneration, broadly using similar practices with regards to the component parts of packages and benchmarking, and as a result ‘the link between pay and performance remains opaque’.

In particular, the research identifies problems with the link between executive pay and performance, with too many companies blindly following the same formula. Long-term incentive plans (LTIP) which use a firm’s share price to determine bonus levels for executives, come in for particular criticism.

‘If LTIPs get put in the bottom drawer for three years, they can take on the quality of “an expensive lottery ticket”, based on a “set and forget” principle. In such cases, the executive will continue doing whatever he or she chooses to deliver on their responsibilities, and the LTIP makes relatively little difference in fine tuning their behaviour,’ the report says.

According to the report, prospects for reform are poor because there is little incentive for any company to change the way they approach executive pay. ‘Like most herd-like behaviour, it will be slow and hard to change, not least because it is in no-one’s interest to change,’ the research concludes.

The research also describes corporate governance regulation as ‘a necessary but insufficient cause of effective performance’, and says it appears increasingly to have a counter-effect of pushing some behaviour backstage, potentially becoming more opaque.

Professor Pye said: ‘Ever more regulation shows an increasing trust in a system of rules rather than in the people who run companies. If this pattern persists then perhaps the next step is global regulation which my research shows is neither feasible nor desirable.’

The report identifies a number of other trends, including what it calls the ‘pitifully low’ number of women on FTSE 100 boards, which it says has only increased from 5% in 1999 to around 12.5% in 2010, despite regulatory reviews and other efforts to increase their presence. During the same period the number of non-UK nationals on boards has increased steadily, up from 23% to approximately 32%.

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