Magazine article Management Today

Package Performance

Magazine article Management Today

Package Performance

Article excerpt

If creating shareholder value is the criterion, why are top executives still paid above-average for below-average results?

Plato would have either bumped off today's fat cats or banished them from his state altogether. The Greek philosopher believed that any lust for wealth was unhealthy, and that it could only lead to eventual destruction. So in his Laws he designed what is probably the first ever pay package linked to only the most modest incentives. Each man, he said, should have a basic unit of wealth - which in those times was land. But Plato's egalitarianism was tempered by a pragmatic view of man's competitive spirit, and he reluctantly permitted individuals to earn four times that basic amount.

Quite what he would have thought of the huge multiples being paid to the top executives in business today compared to its lowest workers hardly bears thinking about. The trends all indicate that the total pay of our most senior company directors is growing faster than ever before, and at a higher rate than lower management levels.

All UK quoted companies operate some form of share option scheme. But there is no doubt that the combined weight of those corporate governance gurus - Cadbury, Greenbury and Hampel - is forcing companies to adopt longer-term incentive plans (LTIPs) linked to future performance over a three- to five-year period.

On the surface this move appears to be a far more effective way of aligning the interests of executives with those of their investors and their workers. Indeed, since many of these schemes have been in operation, the headline basic pay of executives has gone down by about 14%.

A recent survey by the Monks Partnership consultancy reports that 17 of the FTSE-100 companies use share options as the sole long-term incentive, and a further eight intend to use options as the main incentive. Earnings per share (EPS) growth remains the most popular performance measure, with the most usual hurdle being that EPS growth should exceed inflation by 2% per share, or 6% over three years. Some 22 FTSE companies use an EPS inflation target, while another nine use total shareholder return. Nearly all are phasing out option grants. The survey, based on 1996/97 annual reports, also shows that the average salary for a FTSE chief executive and chairman is still about [pounds]500,000, while other board directors can expect to earn about half as much.

Overall, though, research shows that those running top companies will on average receive a remuneration package of around [pounds]1 million a year. The earnings of senior executives below board level are mixed - from [pounds]80,000 upwards - although they too are increasingly linked into longer-term plans which usually give the director up to two times salary in options. What is happening though is that companies are gearing themselves up to pay out huge bonus packages in three to five years' time. Experts say that more than [pounds]100 million will be paid out in LTIPs to top executives by 2000 even if they produce only a modest performance for investors.

So for all the talk of openness, these new schemes can often hide the true amount being paid out unless there are parallel requirements that every detail of a director's package is spelled out in the annual report. Early reports from president of the board of trade Margaret Beckett suggest that she will want the very fullest disclosure possible. There are two alternatives which Beckett is understood to be looking at. One is to require remuneration committees to report to investors on the overall pay schemes. A tougher alternative is that all details of directors' pay packages should be put to shareholders at annual meetings for a vote.

Ex-ICI chairman Sir Ronnie Hampel, who undertook the most recent corporate governance report, predictably concluded that behaviour should be guided by principle rather than by regulation. However, Beckett's cynicism about the City's ability to follow a voluntary code of practice suggests that she may decide on the latter option and that legislation is not far away. …

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