Executive pay: Focus on remuneration packages is distracting from the real issues

 
Tony Manwaring
The Uk Minimum Wage Of GBP5.05
Despite the size of the reward, company performance is often weakly correlated with CEO performance (Source: Getty)

April hasn’t been a good month to be on a remuneration committee.

Earlier this month BP came under fire for awarding their chief executive a £14m deal; last week the Investment Association stated that boardroom pay practice “isn’t fit for purpose”.

Anyone with responsibility for setting executive pay could be forgiven for keeping their heads below the parapet in coming weeks, as it seems inevitable that they will continue to face criticism for failing to get a handle on what the Investment Association terms “remuneration creep”.

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However, at this point, continuing to deliberate about the size of these remuneration packages is distracting from the real issues.

If we don’t have an agreed way of assessing how deserved bonuses are and we’re not ensuring that those at the helm of big businesses are building value for shareholders, customers and stakeholders over the long-term, we’ll never get a handle on their ever increasing pay packets.

It’s fair to say at the moment that benchmarking is often used as proxy for a performance analysis system. No one in business wants to be seen to pay below the industry average, this equals the steady increase we’re faced with today.

Despite the size of the reward, company performance is often weakly correlated with CEO performance. A bad boss doing little may oversee a boom, whilst a smart CEO making steady long-term progress is criticised for overseeing a short-term share price decline.

To get beyond this we need a universally-accepted set of people measures to value the contribution of employees – be they a new recruit or top executive.

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That said, it is clear that those focusing on the size of the bonus are criticising the wrong metric.

It is not the number of zeros that matters, but whether the reward encourages the right sort of behaviour which builds value.

According to our research, 61 per cent of bosses admit their organisation's incentive structures aren't encouraging the right sort of decisions.

We would argue that the very best incentive structures are linked through effective business analytics to short and long-term goals, rooted in the business model.

If it can be shown that a chief executive has delivered against the metrics they were set then they clearly should be awarded their bonus.

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If we are to pay large sums of money, we need to develop robust measures to ensure the sums are justified, integrated reporting, together with frameworks such as the one developed by the Valuing your Talent partnership, along with a firm understanding of the business model are badly needed.

In addition we need to ensure incentives encourage effective long-term decision making. There’s no such thing as a good bonus or a bad bonus, regardless of the number of zeros.

There are only justified bonuses and unjustified bonuses. We should focus our criticism on the remuneration creeps that continue to shirk their responsibilities toward transparency and accountability.

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