Perception of Blue Chips Bigger Problem than Executive Pay

Posted By: Admin, 14 Jun, 2011 - 06:02 pm


Claims that Britain's top blue-chip companies are continuing to pay directors huge incentives despite the economic downturn have reignited the debate over executive remuneration.

According to figures complied by pay consultancy MM&K and corporate governance group Manifest, bosses at FTSE 100 companies earn more than 150 times the UK's national average wage of £23,000.

Moreover, revelations that broking firm ICAP paid director Michael Spencer (pictured) £23m and Britain's fourth-largest grocer, Morrisons, offered finance director Richard Pennycook £1.25m in shares to prevent him from leaving, have only served to intensify the debate surrounding the issue.

Although critics have suggested Pennycook’s 'retention' payment was in breach of best UK corporate governance practice, in my opinion, the real issue at stake here isn't about whether executives should be well paid, but how to challenge the perception that British companies are not performing in line with the remuneration of their directors.

To avoid short-term decision making, which can have adverse affects, it's essential companies attract, retain and motivate talent to deliver at the highest level, and link director remuneration to performance.

This is the approach adopted, quite reasonably, by Morrisons, who said in their annual report: 'While [Pennycook’s retention payment] is an unusual arrangement, the committee considers that the granting of this award is in the long-term interest of shareholders and is satisfied that it is appropriate.'

Therefore, the first step towards resolving the issue is to ask ourselves three questions:

  • (i)                  How much have we learned since the banking crisis?
  • (ii)                Have we revised and implemented the principles suggested in the UK Corporate Governance Code?
  • (iii)               Have our organisations established robust remuneration committees to ensure types and levels of remuneration are structured adequately to provide benefits for all shareholders, employees and the economy as a whole?

Obviously, an executive's remuneration should be tied to their company's long-term success, but do our organisations have this balance right?

Without some kind of structured incentive package, an executive's remuneration may easily become out of sync with the companies they serve and the general economy, which is prone to happen in sectors producing salaries that are out of proportion with a company's value.

But ultimately, as long as a company agrees to inextricably link the executive's remuneration to the company's performance, it's difficult for an outsider to assess what that level of reward should be.

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