IBE provides advice on executive pay for remuneration committee
Providing a simple and fair approach for remuneration committees trying to meet the challenge of getting executive pay right is the aim of a board briefing paper recently published by the Institute of Business Ethics (IBE).
The IBE said the paper, Fair or Unfair? Getting to grips with executive pay, offered both practical advice on how remuneration committees can address the challenge and some pointers to possible reform centred around the need to be clear about the value of what is being awarded and the pace at which remuneration is earned.
Peter Montagnon, IBE’s associate director and author of the report, said: “Fairness and simplicity are two themes running through this IBE board briefing. One of the reasons why executive pay has become so problematic is that it is too complicated and the outcomes often seem quite random. Another is because it enables some executives to earn very large amounts over a short period of time, while others reap only modest rewards. That can easily drive short term decision-making.
“The link between remuneration and performance is not clear, so nobody, including sometimes the recipients, can tell what they are really being paid for. A system that operates like that is bound to attract charges of unfairness and trust will ebb away. The more remuneration committees try to manipulate short term behaviour, the less likely they are to succeed. If their focus is on long term and sustainable growth in cash generation, they will be setting their company and its executives on a course for success.”
Writing in City AM
Montagnon said, “We need less extreme results, more certain payouts and less emphasis on performance conditions that do not actually incentivise. We also need less reliance on annual bonus payments that seem to be dispersed regardless of how the company is performing. A simpler way would be to deliver much more of the package in cash, because everybody can see the value of that, and then expect executives to spend some of this cash on shares which they would have to hold for the long term, regardless of whether they were still employed in the company.
“That would have three advantages. It would create a strong incentive to deliver growing and sustainable cash flow (so that dividends could be paid on the holding) over the long term. It would mean executives had a strong interest in leaving behind a healthy company, not one that was at its peak and vulnerable to collapse as soon as they have gone. That, in turn, would put more emphasis on succession planning, which is too often neglected.”