It's two years since the shareholder spring of 2012 and still companies are suffering revolts on executive pay; Barclays, Standard Chartered, Pearsons and Sports Direct have all been rebuked over board room pay in recent months. This culminated at Burberry last week when 53% of shareholders voted against the Remuneration Report. Why? Because of the totality and the lack of performance conditions attached to the CEO’s package, in particular a ‘golden hello’ of £7.3m. This is despite him already working for the company prior to this appointment and a retention bonus of £20m which will be paid in tranches up to 2018 regardless of how the business performs.
This might seem like an exceptional case but the principles upon which the investors were voting ring true for many organisations; there’s a binding vote on Board Pay and so far protest votes have been registered at 52% of FTSE 350 AGMs.
While annual bonuses are often the focus of shareholder and public concern (they hate bonuses without performance conditions), long term incentive plans (LTIPs) which often make up a greater proportion of total reward are now squarely in the cross hairs - for not being long term enough.
The ability for executives to crystallise LTIPs quickly, encourages them to maximise short term performance rather than promote investment and growth, creating long term value. There’s a trend to increase the timeframe of the LTIP from 3 to 5 years due to the rightly held belief that you need that length of time to assess the impact of an executive’s performance on the company’s value. This trend is starting to show with number of FTSE 100 companies with a minimum term of 5 years increasing from 4 to 27 in 2013/14.
Investors need to play their part too. The average length of time a share is held in the UK is 7 months and listed companies are bound by quarterly reporting. So investors must also take a longer term and perhaps, slightly different view of success to move from share price to long term added value and sustainability.
But, is a longer term focus attractive to executives? Clearly being able to access reward sooner rather than later will be attractive, but as more and more companies adopt the longer term focus this argument will diminish and is an executive who wants as little skin in the game as possible sending the right messages for your organisation?
So, how do you foster long term thinking in your executive pay?
-
Increase your LTIP term to 3 or 5 years
-
Have a requirement to defer a proportion of annual bonus
-
Pay some of the bonus in shares, to become realisable at the date of leaving
But it’s not just about the plan mechanics, it’s about the measures that are used. Executive pay is overwhelmingly linked to short term measures of corporate performance such as Earnings per Share, Total Shareholder Return or share price movement, which in turn, encourages short term thinking such as cost cutting or the need for quick returns. CEO pay has trebled in 10 years without the corresponding long term increase in share values.
Organisations should consider linking executive reward to areas of non-financial performance that improve long term success; customer satisfaction, employee engagement and corporate social performance are some of the pillars that are vital to long term interests and will be the keys to long term sustainability and success for businesses.
