I went to an interesting debate on executive pay recently at the Financial Times Non-Executive Directors’ Forum. One of the speakers expressed the view that remuneration committees in public companies are no different from any other group of humans interacting with each other. Fundamentally, it seems we are all motivated by sex, greed and fear or, in the case of remuneration committees, perhaps more especially the last two of these.
Recent statistics contained in an EY report on executive pay certainly seem to support this theory. According to the report, the average total remuneration package for a FTSE 350 chief executive is £3,617,000. The average UK pay is £26,000. Doing the arithmetic, it takes a FTSE 350 chief executive approximately 2½ days to earn the UK annual average salary.
When we dig more deeply, the explanations as to why we are where we are inevitably become more complex.
What Should be Done?
That said, a broad consensus seemed to emerge from the debate along the following lines:
- There should be no widespread objection to the principle that genuine creators of wealth in the UK economy should be rewarded for and participate in that wealth.
- Rewarding failure or excessively rewarding indifferent performance is not acceptable.
- There is a risk that fear (i.e. the fear of hemorrhaging your talent by failing to keep up with the pay scales of competitors) unduly influences outcomes.
- More plain common sense and moral fibre and less interference by executives with the remuneration committee’s deliberations is desirable.
- Greater focus should be placed on long-term incentives, i.e. 5-6 years plus an additional cooling off period after the departure of executives before final bonuses/incentives are paid.
- Healthy scepticism should be applied to the balanced score card approach to remuneration since this may result in lowering the barriers for achieving targets on the basis that the more targets there are, the easier it is to hit at least some of them.
- The new regulations on executive pay introduced by the Department of Business Innovation and Skills (about which I have previously blogged) should soon begin to have an impact provided that shareholders play their part.
As experience shows though, it’s easier to set out a good recipe on paper than to produce the perfect dish.