UK remuneration system still ‘not fit for purpose’, says CIPD
A third of FTSE 100 chief executives didn’t receive a salary increase this year, as employers tightened their remuneration plans, PwC research has suggested.
But while 36 per cent of CEOs’ annual pay didn’t rise from the year before, up from a quarter in 2014, bonus outcomes were largely unchanged, with CEOs at four out of five companies paid more than half the maximum bonus.
According to PwC’s ‘Taking stock – Review of 2015 AGM season’ report, the median annual bonus paid to FTSE 100 bosses in 2015 was £1.12m, an increase of 3 per cent from the previous year.
The report, based on analysis of annual reports from the FTSE 100, revealed that many companies are introducing best practice remuneration structures in response to shareholder demands.
Tom Gosling, executive pay partner at PwC, said this year’s results continued the trend of “largely static executive pay levels in real terms since the financial crisis”.
“But with the average FTSE 100 CEO earning in a year what several ordinary people might earn in a working lifetime, remuneration committees need to make sure that payouts are fully justified by performance to help rebuild trust in business,” he said.
“The consistency in bonus payouts is raising questions about how well variable pay is living up to its name. To build trust in the system, remuneration committees must continue to improve the quality of disclosure about how bonus targets are set and whether they are sufficiently stretching. This is likely to be where shareholders’ focus will shift next,” he added.
In an effort to improve bonus disclosure and make pay ‘harder to earn’, executives are increasingly required to hold shares for longer, and employers are introducing performance measures that more closely link to company strategy, the report found.
Most employers have introduced clawback measures so that bonuses can be reclaimed in the event of wrongdoing.
But Charles Cotton, performance and reward adviser at the CIPD said that the UK was operating with a system of executive reward that overall is “not fit for purpose” and adding measures to an “already broken system” would not rebuild trust.
“Bonuses and long-term incentives are not incentivising good performance, and are too complicated” he said. “We’re relying on an outdated system where CEOs are seen as responsible for the whole of the company’s performance and are paid handsomely to do that.
“Successful organisations today thrive on collective endeavour, and that needs to be reflected in the reward strategy,” he added.
The challenge lies in getting consensus about what the right reward practice looks like, Cotton said, but the answer could be to move away from just focusing on the needs of the shareholders demands and instead looking to include the needs of various stakeholders, such as clients and employees.
“Businesses need to go back to the drawing board and determine what is important to them and then tailor their reward approach to take into account not just financial performance, but the needs of the business, quality products and a great people strategy,” he said.