Bonus schemes based on Long-Term Incentive Plans should be scrapped from 2018, according to a wide-ranging new report from MPs.
The ban, part of a report published today, is one of a raft of measures on corporate governance designed to improve trust in British business.
MPs said LTIPs, which provide shares instead of pay for bosses with quantities dependent on different metrics, create “perverse incentives” and “encourage short-term decision making”.
However, parliament’s Business, Energy and Industrial Strategy committee maintained that long-term planning should be maintained, instead suggesting that numbers of shares should be specified as part of remuneration packages.
It has called for the Financial Reporting Council to consult on establishing deferred stock vesting over a longer term as “best practice” as part of a simplification of bonus structures.
MPs also warned that the use of short-term performance related cash bonuses should be limited, adding that bonuses should be “genuinely stretching”.
MPs also backed publication of pay ratios comparing executives to all UK staff.
CBI director general Carolyn Fairbairn gave the LTIP ban proposal a cautious reception: “While complexity remains a problem with long-term incentive plans, banning them outright would reduce flexibility for companies to reward their senior leaders.”
The government is currently considering its own measures on executive pay after embarking on a consultation closing in February.
A spokesman for the BEIS department said: “We are committed to creating an economy that works for everyone, and that’s why we have consulted on options to strengthen corporate governance.
“The green paper set out a range of options to address concerns around levels of executive pay.
“We are considering the responses received and will respond in due course.”
- Private companies should be handed a new governance code, and face the scrutiny of an expanded Financial Reporting Council, funded by a levy on businesses.
- The FRC should also publicly assess the governance plans of firms on a “traffic light” basis.
- Remuneration committee chairs should be expected to resign if pay proposals are backed by less than 75 per cent of voting shareholders.
- Where a pay package is rejected by more than 75 per cent of voting shareholders, the following year a vote on pay should be regarded as binding.
- Workers should also be represented on remuneration committees, and companies should consider establishing advisory panels to include workers, consumers and suppliers to help foster collaboration and dialogue.
- The FRC should consult on requiring the publication of pay ratios between the chief executive and both senior executives and all UK employees. There should be a further evaluation of whether these measures should be expanded to include public and third sector bodies above a certain size.
- The government should set a target that from May 2020 at least half of all new appointments to senior and executive management level positions in FTSE 350 and listed companies should be women, with companies forced to explain if they fail to meet targets.
- Similarly, wherever there is a reference to gender, the FRC should also ensure that ethnicity is covered, and given equal prominence.