- Reward is not sufficiently linked to performance
As media and shareholder scrutiny of top pay gathers pace, non-executive directors (NEDs) at the UK’s leading companies agree that executive reward is too high, according to new research from global management consultancy, Hay Group.
In addition, NEDs express serious concern that remuneration committees are not effectively linking pay with business performance.
Hay Group’s new study, The Trouble With Executive Pay, interviewed 60 NEDs currently serving on FTSE 350 remuneration committees. This study is the first to examine the views of this particular stakeholder group in detail.
A high price to pay?
Almost three quarters (73 per cent) of NEDs agree with the popular view that remuneration is too high.
The overwhelming majority (87 per cent) state that executive reward needs to change. However there was no consensus view on the nature or extent of the changes required.
Jon Dymond, Director at Hay Group comments: “More astute committees are starting to realise that forever chasing the median is not the answer to setting executive pay. Rather a more bespoke approach to reward, better shareholder engagement and more effective communication are sorely needed.”
The missing link
High executive pay is not the only point of concern and many NEDs say that committees are failing to link pay to performance.
Almost nine in ten NEDs (87 per cent) state that the connection with performance is insufficient, with the majority (56 per cent) agreeing that remuneration committees have become less effective at linking pay with performance for senior leaders.
“When performance is good, we want to reward. When performance is poor, we want to encourage,” one interviewee explained: “Frankly, we need to toughen up.”
Jon Dymond comments: “Clearly, performance is about more than generic financial metrics and short-term share price outcomes. Remuneration committees need to take a clear view on what performance means for the specific organisation given its maturity, sector, strategy and culture and then develop incentive plans that align to that vision.
“There is always a trade-off between pay for performance and the retention of executive talent but committees need to consider this much more explicitly.”
Squaring the circle
With NEDs seemingly no more content with executive pay than the investors behind the shareholder spring, could there be a point of agreement?
Jon Dymond comments: “The two things that all parties – investors, NEDs and executives – seem to agree with is that pay needs to reflect the nature and circumstances of the organisation and that high pay is only justified by high performance.
“This could be the foundation for a new, better approach to executive pay. However it will mean a change in behaviour on the part of committees with external pay comparisons taking a much less prominent place than hitherto.”
