Long-term incentive plans for bosses 'damage firms'

http://www.theguardian.com/business/2015/may/13/long-term-incentive-plans-for-bosses-damage-firms

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Incentive plans that have allowed bosses at companies including advertising giant WPP to collect tens of millions of pounds in pay should be abolished, according to a committee of independent experts.

The complex multi-year pay deals known as long-term incentive plans or LTIPs, now a feature of most FTSE 100 bosses’ remuneration, have driven executive pay up to “unwarranted levels” without delivering the same improvement in company performance, according to a report.

“We need to recognise the flaws in the system and stop paying CEOs on metrics that encourage gaming,” the authors said. “We have looked at the growing complexity of awards that has pushed directors’ pay into the stratosphere and found there is little discernible link with corporate success. In fact, there is an argument that it is actually damaging the economy.”

Produced by a commission convened by the High Pay Centre, whose members included Simon Walker, director general of the Institute of Directors, and former Hermes fund manager David Pitt-Watson, the report concludes a year-long inquiry into how corporate Britain’s top brass are rewarded.

City economist Andrew Smithers, also on the committee, argues that many pay plans effectively encourage executives to slash investment – either in equipment or human resources – to a potentially unsustainable level, while pursuing speculative takeovers and concentrating resources on share buybacks in order to increase the share price, boosting their LTIP payouts – which are usually in the form of shares in the company.

LTIP payments to FTSE 350 directors increased by more than 250% between 2000 and 2013, about five times as fast as returns to shareholders, the report says.

Evidence that performance-related pay actually improved performance was weak, said the report’s authors, while targets linked to profits and the share price can “create perverse incentives that are damaging to businesses and the wider economy in the long-term”.

WPP founder and chief executive Sir Martin Sorrell’s long-term pay plan, which sparked repeated shareholder protests, boosted his total pay to £30m in 2013 and £43m in 2014, making him the best paid UK public company boss two years running.

At Cable & Wireless, a notoriously value destroying demerger saw the telecoms company split in two and its top executives share some £88m in LTIP rewards over five years, just as the share price collapsed.

Energy company BG Group was forced to cut the £25m it promised incoming boss Helge Lund earlier this year. The debacle was followed by protests this spring at Man Group and RSA Insurance, where chief executive Stephen Hester’s comparatively modest £5m package was rebuffed by about 16% of investors.

“Performance-related pay has failed on its own terms,” said High Pay Centre founding director Deborah Hargreaves. “It doesn’t encourage or reward good business performance. The only effect it has is to make executive pay packages more complex, less aligned with the interests of the company and much, much bigger.”

Annual bonus payments should be made in cash and not shares, according to the committee, to prevent executives benefiting from sudden increases in the share price triggered, for example, by takeover bids.

It said “golden hello” payments of the kind proffered to Lund should not be made unless the position being filled had been advertised as part of an open recruitment process and recommended that the corporate remuneration committees that set pay should include people from a wider range of backgrounds.

The typical remuneration committee member is paid about 16 times the UK average, research by the Trades Union Congress has found, and more than a third of committee members are themselves executives of other companies.

LTIPs usually constitute the largest element of executive pay. They are typically three years in length and were used by about 90% of FTSE 100 companies in 2013, up from 30% in the mid-1990s. Over the same period, the average value of LTIP payments to FTSE 100 lead executives increased from 40% of pay to more than 200%.

The so-called shareholder spring that brought the first big protest votes over pay in 2012 has returned in 2015, with revolts in recent weeks at the bookmaker Ladbrokes, satellite operator Inmarsat and broker Tullet Prebon. Last month, British Gas owner Centrica also faced a row over pay for its new boss, Iain Conn, when one in three investors failed to back his deal.