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Call for change of approach towards Chief Executive pay

Despite recent policy changes by the last UK Coalition Government chief executive (CEO) pay has still been rising and, according to a recent report by the Chartered Institute of Personnel and Development, current executive reward practice is based on misplaced assumptions about the motivating force of money.

The research, The power and pitfalls of executive reward: A behavioural perspective, found that  the gap between CEO pay and other employees’ pay continues to increase and baseline salaries as well as long- and short-term incentives have risen even during times of economic recession. The report’s authors also suggest that CEO reward is rarely sufficiently adjusted to reflect a decline in company performance, while shareholders and social influences such as board dynamics also push up rewards. At the same time financial metrics still dominate in determining variable rewards and the report says that other measures have less of an influence and need more attention in the research literature.

The report draws on an evaluation of academic literature to outline the relevant theories, research and findings (including pay and voting data sourced from Manifest), which also included a consultation of experts in the field; a workshop and follow-up consultations with a sample of senior leaders, reward specialists and reward consultants and a survey of over 50 top Human Resources specialists, reward specialists, CEOs and reward consultants.

The most recent changes to public policy contained in The Enterprise and Regulatory Reform Act (ERRA) 2013 requires UK listed companies to publish a ‘single figure’ detailing the total pay awarded for the lead executive’s position but have had little effect on CEO pay levels up to now.

The authors believe that CEO reward practice has reached a ‘crisis point’ and the data they present shows that CEO pay is more influenced by FTSE rankings and size than financial performance. The report recommends a new approach to CEO pay suggesting that its analysis ‘shows that current executive reward practice is based on misplaced assumptions about the motivating force of money. CEO reward practice also, therefore, fails to address some of the root causes of why current rewards might not have the desired effects. Organisations need to become more diverse, more embracing of shared and accountable leadership, more transparent in their reporting and more concerned with stakeholder rather than simply shareholder value’.

The Manifest 2015 Executive Total Remuneration Survey, produced in association with MM&K, features analysis of CEO and other executive director pay and a new investor perspective on remuneration simplification from Robert Talbut, former CIO of Royal London Asset Management. It is available now from https://www.manifest.co.uk/shop/

What do you think?