The trouble with executive pay
The banking crisis
The debate about directors' remuneration has focused on performance related pay and preventing rewards for failure. However, in the midst of the banking crisis, questions are being asked as to what part the way executives are paid has played in the fall out.
The Financial Services Authority and the Treasury Select Committee are investigating whether inappropriate remuneration schemes may have contributed to the current situation by incentivising staff to pursue "risky policies" that undermined the 'checks and balances' that are supposed to prevent excessive risk-taking.
Desirable remuneration practices
Remuneration practices that are long-term in nature are welcomed by long-term investors and include:
- Challenging performance criteria.
- Performance periods of at least 3 and ideally 5 years where the awards vest after this period, encouraging retention and sustainable strategy.
- Incentives should be linked to sustainable value creation and executives should not be compensated for market or industry wide rises in stock prices.
For example, BHP Billiton Plc (Good Companies Guide position: 19th) uses a 5 year performance period for its Long-term incentive plan, head and shoulders above the standard 3 year period.
Short-term practices to watch out for include:
- High base salary both in comparison with their sector and in comparison with their total remuneration package.
- Emphasis on big cash bonuses.
- Anything with a short performance period i.e. 1-2 years.
Companies with examples of short-termism in their remuneration structure are easy to find:
| Talvivaara Mining Company | Disclosure of remuneration package very poor. Unable to take a view on the drivers behind the pay package. | GCG position: 302 |
| COLT Telecom Group SA | Complete lack of disclosure on previous schemes, new schemes and the Special Stock Plan in operation. A Special Retention Bonus was paid to Mr Bates of 75% of his salary to retain him in the business. |
GCG position: 298 |
| Brown (N.) Group | Double-digit increases in base salary without justification. | GCG position: 290 |
| Euromoney Institutional Investor | The structure of the profit share scheme is a concern because no profit threshold must be achieved before a bonus is paid. | GCG position: 280 |
| Daejan Hdg | There is a lack of performance related incentive schemes and long-term incentive schemes. Disclosure related to the remuneration policy is scant. Base salary is at the top of the sector. | GCG position: 308 |
| Vedanta Resources | Significant salary increases have been awarded for the fourth consecutive year. | GCG position: 292 |
