Executive pay myths raise risk of misdirected reform

Published at 09:43 AM on 17 February 2017

Executive pay needs reform, but if the public narrative surrounding executive pay is not based on robust evidence, there’s a risk that policies won’t have the desired effect, leading to further public disillusionment over pay.

A new PwC report identifies four common myths that are widely believed and drive momentum for reform, yet are not supported by rigorous academic evidence. These myths matter, because they can lead to false conclusions and risk reform shooting at the wrong target.

Tom Gosling, head of reward at PwC, said:

“Executive pay needs reform, but it’s vital we focus on the right issues if that reform is going to be effective. If we wrongly diagnose the illness then the cure won’t work. We need to base reform on robust evidence.

“The most important area for reform is pay design, to ensure pay encourages long term thinking and only provides the highest rewards for sustainable long term performance.

“But it’s also vital for boards to improve oversight of pay fairness and to explain how they achieve this in a convincing way, to rebuild public trust in the pay process.”

 

So what are the four common myths?

1: Companies ignore shareholders on pay

Over the last three years around one in 10 FTSE 350 companies received votes in favour of their remuneration report below 80%, the common benchmark for significant opposition. One year later these companies improved their vote by 17% points on average. Only around 2% of companies experience consistently high levels of opposition on pay votes, with the vast majority of companies responding to shareholder concerns.

 

2: The increase in CEO pay over the last three decades is unjustifiable

80% of the increase in UK CEO pay since the early 1980s can be explained by the six fold real increase in the size of a typical FTSE 100 company in that time. The CEO pay market has a number of weaknesses, but overall pay levels are more readily explained by rational economic forces than is commonly assumed.

 

3: There is no link between pay and performance

Most analysis of pay and performance ignores basic adjustment for company size and fails to take account of the impact of shares executives already hold. Allowing for these two factors, performance explains nearly 80% of the variance in total CEO pay in the UK.

 

4: Incentives don’t work

The overwhelming evidence shows that incentives do influence CEO behaviour, just not always in the way intended. CEO jobs are complex and performance targets have a tendency to oversimplify the reality. Evidence shows that overuse of performance based incentives can lead to short-termism. By contrast, high and long term shareholding are found to encourage better long-term performance.

 

ENDS

 

Notes to editor:

For more information on the issue of executive pay read PwC’s  ‘Time to Listen’ report, which discusses the current state of public attitudes to executive pay and inequality and where policy will need to focus to achieve an enduring settlement on this issue.  http://www.pwc.co.uk/services/human-resource-services/insights/time-to-listen.html

For interviews and more information please contact Nicola Thorogood on 020 7804 6007 or nicola.thorogood@uk.pwc.com

 

 

Ends.


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