06/01/2015 - Top pay unrelated to performance

toppayThe idea that paying top executives big money leads to better performance for companies is a myth. Great Pay doesn't always come with Great Performance. The supposed link between pay and performance doesn't actually exist.


Research on top executive pay over the last decade has found that it had little or no correlation with key performance indicators that companies highlighted to shareholders. The research was undertaken by CFA UK and Lancaster Business School over the 10 years from 2003 to 3013 at 30 of the FTSE-100 companies. It found that executive managers’ pay is still determined by simplistic measures that bore little relation to long-term drivers of companies’ value.


Over a period when average incomes across our nation fell (in real terms) close to 2003 levels, total chief executive remuneration has increased by two-thirds from £2.4 million in 2003 (£46,150 per week) to £4 million in 2013 (£76,900 a week). Even that was only the average at the top. Heads of health-care groups were paid £7.3 millions a year in 2013 (£140,385 a week), and oil and gas chiefs, predators on rising energy bills for ordinary households, managed to scrape a living on Just £5.7 millions a year (£109,615 a week)!


Earnings per share is the simplistic performance measure most commonly used, though it tended to be used only one way. If earnings per share rose 20%, top executives felt justified in demanding at least a 20% hike in basic pay, plus of course a big leap in bonus payments. If earnings per share fell by 20% it was a different story. Bosses might not get the hoped-for salary increments or expected bonus. Rarely if at all were obliged to take a 20% cut in basic pay!


The CFA concluded that over-reliance on such poor measures of executives’ performance led to ‘investment myopia, earnings manipulation, excessive risk-taking, and threats to organisational culture’.


Pat Harrington of Solidarity Union commented: "This analysis shows that the market, left to itself, will not set appropriate pay levels for executives. It's one reason we believe workers must be given a greater say in how companies are run through Trust and Partnership models. The ratio between executive and worker pay must be reasonable and appropriate.Changes in legislation and State action are the only way this is going to happen. Reliance on the market or Executive restraint is misplaced."