A new report by the CIPD shows that most chief executives’ pay packets are largely not based around the investments and improvements made to employee-related issues. The report states that this offers “essentially no incentive” for companies to focus on HR-related issues.
The CIPD (Chartered Institute of Personnel and Development) have released a new report which highlights the lack of incentive companies have to address HR-related issues.
This research shows that only around a third of companies within the FTSE 100 (34 per cent) used employee metrics when deciding how much senior leaders are to be paid (performance-related pay packages). This was 31 companies in total.
For the companies that do utilise employee metrics, around 27 companies (which accounts for 30 per cent of the total 34 per cent) only considered employee metrics when calculating bonuses.
In addition to this, the average weighting for employee metrics in performance-related pay across the FTSE 100 was only 2 per cent, showing that it accounts for very little when considering how much should be paid to leaders.
Additionally, even when looking at the companies that did report using employee metrics, the weighting was only found to be 5.9 per cent.
For long-term incentive plans, this use of employee metrics fell to 0.8 per cent across the FTSE 100.
However, in comparison to the use of financial metrics, all of the FTSE 100 companies that had access to analysable data on performance-related pay used this to calculate pay packages.
Overwhelmingly, 99 per cent of FTSE 100 companies also used financial metrics to assign bonuses and 100 per cent of the companies used the financial metrics within their long-term incentive plans.
Compared to employee-related metrics which only made up two per cent of the weighting for performance-related pay, financial metrics had an average rating of 82.4 per cent.
In the report, it states the problem with the lack of priority that is given to employee-related issues:
For the minority of companies that do include employee-related targets in performance related pay plans, it is still the case for many that the incentive to act in the interests of employees is so small in comparison with the incentive to pursue financial returns that it is essentially no incentive.
To give a typical example, if a CEO is faced with an 80 per cent weighting on financial metrics and a 5 per cent weighting on employee-related matters, in practice that CEO is likely to give very little consideration to the employee-related target, if any at all.
The research from CIPD and High Pay Centre suggests that in order to tackle this, remuneration committees must widen their remit to consider wider issues such as organisational culture, diversity, wellbeing and reward when setting executive pay.
Other suggestions to rectify this situation include appointing HR professionals to remuneration committees to ensure a wide scope of expertise.
*This research was obtained from CIPD and High Pay Centre’s report ‘CEO Pay and the Workforce: How employee matters impact performance-related pay in the FTSE 100’ which used the analysis of active FTSE 100 board-levels performance-related pay plans using information available from the most recently published annual reports as of Q1 2020.
Monica Sharma is an English Literature graduate from the University of Warwick. As Editor for HRreview, her particular interests in HR include issues concerning diversity, employment law and wellbeing in the workplace. Alongside this, she has written for student publications in both England and Canada. Monica has also presented her academic work concerning the relationship between legal systems, sexual harassment and racism at a university conference at the University of Western Ontario, Canada.
