Metrics used to assess performance criticized as short-termist
Two new studies reveal something interesting about executive pay in the UK and Europe. The first highlights a ‘disconnect’ between high executive pay and good performance and the second states UK executive pay is the most generous in Europe.
A new academic study by Lancaster University Management School finds that although big company bosses enjoyed pay rises of more than 80 percent in a decade, performance as measured by economic returns on invested capital was less than 1 percent over the period.
‘Our findings suggest a material disconnect between pay and fundamental value generation for, and returns to, capital providers,’ the authors of the report say.
In a study of more than a decade of data on the pay and performance of Britain’s 350 biggest listed companies, Weijia Li and Steven Young find that remuneration increased 82 percent in real terms over the 11 years to 2014.
Much of the increase was the result of performance-based pay.
But, the report’s authors say, the metrics used to assess performance — such as total shareholder return and earnings per share growth — are unsophisticated and short-termist, acting against the interests of long-term investors.
The research says the median economic return on invested capital, a preferable measure according to the authors, was less than one per cent over the same period.
The evidence will give the UK government questions to ponder.
When Theresa May took over as prime minister in the summer, she vowed to push an agenda to curb excessive pay. Last month, the government published a green paper outlining proposed reforms, which had been watered down compared with May’s earlier statements.
According to another study by the Belgian Vlerick Business School’s Executive Remuneration Centre, UK executive pay is the most generous in Europe.
This research found that the median UK chief executive earned €6.17 mn ($6.42 mn) last year, 50 percent more than the average counterpart in Germany, the next best paying country.
The study of 701 companies also finds that UK chief executives receive a higher proportion of their total remuneration as variable pay, relative to continental European business leaders. Such bonuses and long-term incentive plans are often tied to earnings per share and total shareholder return.
Xavier Baeten, the centre’s founder, says: ‘People say, If you pay peanuts, you get monkeys. Our study doesn’t show that you can pay peanuts, but it does show that you won’t get the best chief executives by overpaying them.’
A higher percentage of chief executives in the UK received pay rises than those in Belgium, France, Germany, Sweden and the Netherlands, which were the other countries studied.
A total of 70 FTSE 100 chief executives saw an increase in short-term incentives in 2015, 73 saw long-term rewards increase, and all but two received a rise in fixed salary.
Shareholders have been paying closer attention to executive pay this year, causing high-profile revolts by investors in companies such as BP, Shire and Anglo American.
The median pay package for a FTSE 350 chief executive was nearly £1.9 mn ($2.32 mn), compared with £1 mn in 2003. The highest paid sector, with a median of £2.9 mn, was healthcare. The average financial sector chief executive earned less than £1.7 mn.
Will Goodhart, who heads CFA UK, the body that promotes a high standard of business ethics, says: ‘While there’s been an enormous debate about pay and performance, the debate hasn’t been sufficiently refined around the definition of performance.’
