PwC Survey shows slow progress on UK executive pay and bonuses.

The latest PwC survey on executive pay and rewards in the FTSE 100 is presented as an improving trend. Yet it is remarkable that just 36% make full disclosure of bonus benchmarks. There is little sign of realism in incentives; many rewards remain detached from sustainable value creation. Too many do not disclose numbers to evidence the payouts, typical claiming “commercial sensitivity”. Others rely on a single target indicator. Some of high profile FTSE problem companies such as Tesco and Glencore have shown just how well paid strategic failure can be. In many companies, rewards remain focused on the short term, with opaque metrics. There is little sign that boards are willing to build in the potential for claw backs of bonus that subsequent events call into question. Change is slow; shareholders and boards need to raise their game.

Despite the potential now for shareholders to register dissent, only the largest institutional investors can hope to have any impact on the remuneration setting process itself. The problem may even be the composition of boards; it seems too many non-executive directors come themselves from a culture of high pay. The Department for Business Innovation and Skills (DBIS) consultation in September 2011 aimed to establish a “clear line of sight” between the levels and structure of remuneration and directors’ performance in meeting strategic objectives. But targets are often opaque, irrelevant or too short term. Goalposts shift, as companies redefine earnings per share or return on invested capital. The volatility in year to year rewards points to short-termism. In FTSE 100 companies, three year vesting periods remain the most common and there is little sign of real long-term alignment with the timescale on which strategy might succeed or fail.

The new binding votes on company pay policies every three years have not had a major impact on pay practices. Indeed shareholder activist seems to have waned since 2012. Why is progress so slow? It seems that the response to each new wave of pressure on boards and management is to employ external consultants. This facilitates engagement with the biggest shareholders and ensures a process. But the end result is lengthy remuneration reports, often fudging what actually has been paid and whether targets have actually been hit. Much still looks like an option on stockmarket progress, or even just an incentive to talk up the shares. Many of the bonus metrics are changed so often, it is unsurprising that pay has uncoupled from longer term corporate performance.

Chief executives can collect for behaviour that might be assumed to be in base pay, such as “engagement with colleagues”. Many of the incentives that feature in remuneration reports look like they should be simply part of what an effective CEO should do to keep his or her job.

The CEO bonus culture contrasts with lower pay grades; many mid-managers and other employees are expected to perform primarily for base pay, and progress in that. Indeed, academic research points to the limits of motivation by extrinsic financial reward. It can even be counter-productive in areas where quality or ethics really matter. Some incentive arrangements appear so complex that the consultants and executives involved must have diverted a great deal of time and effort in design and negotiation.

Surprisingly, despite the importance of effective pay design, remarkably little independent research has been conducted. Measures are simply plucked out of the air with little hard evidence that they work over the longer term. Despite this, EPS and TSR still remain common, and the measurement and retention periods are relatively short. Companies still hide behind their consultants and claims of commercial confidentiality. Boards should be required to say exactly what they expect an incentive to deliver.

Many large company boards seem unable to challenge these trends, fearful they will lose a star CEO. Would UK business really be hampered in global competition by making a change in setting pay? Strategic failure in some of Britain’s biggest companies seems related more to the structure of pay and the wrong metrics, rather than the total sums. Surely the best executives would still be attracted by a package that paid for what they could really influence. What is missing is an evidence-based understanding of the role of executive bonuses in long term corporate success. A more radical review of bonus structures is now needed.

Disclosure: The opinions expressed in this article are my own, and may not represent the views of any firm or entity with which I am affiliated. I have no business relationship with any company mentioned in this article. The information presented in this article has been obtained from sources believed to be reliable; however, I make no representation as to their accuracy or completeness and accept no liability for loss arising from the use of the material. Articles and information do not represent investment advice.

Image credit; Wiki, rights reserved.

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