02 April 2006
Welcome
Welcome to the Performance and Reward blog.
This blog is about executive pay. It is mainly concerned with executive pay in large companies in the UK, but executive pay is a worldwide problem so all executive pay is of interest.
Follow the links in the left hand column to access the resources available through this blog.
This blog is about executive pay. It is mainly concerned with executive pay in large companies in the UK, but executive pay is a worldwide problem so all executive pay is of interest.
Follow the links in the left hand column to access the resources available through this blog.
The Problem
Current the bigger FTSE companies in the UK manage executive pay very badly. There are two key problems:
All of this is very bad for the returns generated by listed companies in the UK. This in turn threatens the returns generated by investment products and pension funds throughout the UK, having an adverse effect on everyone in the country. The problems of executive pay need to be addressed urgently.
Firstly the way that executive reward packages are structured provides the executives with very bad incentives. Instead of encouraging executives to focus on the long term interests of the shareholders the incentives often encourage them to focus on their own personal short term interests. Executive reward packages need to be restructured so that incentives are focused on the long term interests of shareholders.
These two problems have caused company boards to loose sight of their primary objective of serving the long term interests of their shareholders. This has caused a complete breakdown of trust between shareholders and board members. Huge efforts have been made to restore trust through "Corporate Governance" but often this fails to address the real underlying problem which is executive pay. Instead it results in more and more red tape, scrutiny, excessive requirements for external communication, and business environments that are unreasonably averse to risk.Secondly the overall level of executive pay has risen far too high. The level of executive pay is now so high that it is almost impossible to think of the executives as agents of the shareholders, working to promote the shareholders' best interests. Instead the very high pay suggests that we should think of executives as excessively concerned about their own personal rewards. This creates a very unhelpful image. If companies are to thrive we need to maintain a positive view of executives as people primarily concerned with the interests of shareholders and other stakeholders. For this reason it is important that the overall levels of executive pay are reduced.
All of this is very bad for the returns generated by listed companies in the UK. This in turn threatens the returns generated by investment products and pension funds throughout the UK, having an adverse effect on everyone in the country. The problems of executive pay need to be addressed urgently.
Solutions
There are no easy solutions to the problems in executive pay. However there are many helpful steps that can be taken and this blog explains some of them. This blog provides three particular resources to help address the problems of executive pay. The three resources are:
The Combined Code Changes. The Combined Code provides guidance on how company boards should be managed for listed companies in the UK. The Combined Code is currently very ineffective in addressing executive pay. Click here or follow the link “Combined Code” on the left to see how the Combined Code could be improved.
The Competition Law Case. The current arrangements for setting executive pay in the UK amount to an appalling breach of competition law. An investigation by the competition authorities is long overdue. Click here or follow the link “Competition Law” on the left to understand the case under competition law.
The Book. I have recently published “Performance and Reward” as a book. This sets out in detail the problems with executive pay and what can be done to address them. Click here or follow the link “View the book” on the left to find out more about the book.
The Combined Code Changes. The Combined Code provides guidance on how company boards should be managed for listed companies in the UK. The Combined Code is currently very ineffective in addressing executive pay. Click here or follow the link “Combined Code” on the left to see how the Combined Code could be improved.
The Competition Law Case. The current arrangements for setting executive pay in the UK amount to an appalling breach of competition law. An investigation by the competition authorities is long overdue. Click here or follow the link “Competition Law” on the left to understand the case under competition law.
The Book. I have recently published “Performance and Reward” as a book. This sets out in detail the problems with executive pay and what can be done to address them. Click here or follow the link “View the book” on the left to find out more about the book.
Combined Code
The Financial Reporting Council (FRC) publishes the Combined Code which provides guidance on how listed companies in the UK should organise their company boards. A company is listed is you can buy and sell shares in that company on a stock exchange. The Combined Code does give some guidance on executive pay, but the problems we now have show that the guidance has been very ineffective.
In October 2005 the FRC conducted a consultation about the implementation of the Combined Code. I sent in a detailed response showing how the Combined Code could be improved to make it more effective in respect of executive pay.
Clear here to open my submission to the FRC (pdf file, 41 pages, 4th Oct 2005)
In October 2005 the FRC conducted a consultation about the implementation of the Combined Code. I sent in a detailed response showing how the Combined Code could be improved to make it more effective in respect of executive pay.
Clear here to open my submission to the FRC (pdf file, 41 pages, 4th Oct 2005)
Competition Law
Executive pay in a large listed company is set by the Remuneration Committee. Most remuneration committees decide the appropriate level of executive pay by making comparisons with what other similar companies are paying. This practice is called Comparative Pay Positioning.
The big problem with comparative pay positioning is that almost all companies want to pay their executives an average amount or more than an average amount. Of course this is impossible because, by defintion, half of all executive pay must be below average, but this does not stop the remuneration committees from trying! Each year they increase executive pay to achieve average postion or better. Almost all remuneration committees do this so the level of executive pay is forced ever higher.
Comparative pay positioning creates a powerful upward ratchet on executive pay. It is therefore a price fixing mechanism and so it is illegal under competition law. I have been in dialogue with the Office of Fair Trading (OFT) who enforce competition law in the UK. The OFT should investigate and clamp down on comparative pay positioning before it forces executive pay up even higher.
Click here to open my first submission to the OFT (pdf file, 28 pages, 9th April 2005)
Click here to open the OFT's response (pdf file, 2 pages, 26th April 2005) reconstructed from scan.
Click here to open my second submission to the OFT (pdf file, 16 pages, 28th June 2005) attachments not included.
Click here to open the second response from the OFT (pdf file, 2 pages, 10th August 2005) reconstructed from scan.
Click here to open my third submission to the OFT; a letter requesting a market study (pdf file, 9 pages, 9th September 2005)
Click here to open a description of my exchanges with the OFT between September 2005 and June 2006 (pdf file, 3 pages, 9th June 2006)
Click here to see the antitrust case for the US market (Posted 3rd August 2006)
The big problem with comparative pay positioning is that almost all companies want to pay their executives an average amount or more than an average amount. Of course this is impossible because, by defintion, half of all executive pay must be below average, but this does not stop the remuneration committees from trying! Each year they increase executive pay to achieve average postion or better. Almost all remuneration committees do this so the level of executive pay is forced ever higher.
Comparative pay positioning creates a powerful upward ratchet on executive pay. It is therefore a price fixing mechanism and so it is illegal under competition law. I have been in dialogue with the Office of Fair Trading (OFT) who enforce competition law in the UK. The OFT should investigate and clamp down on comparative pay positioning before it forces executive pay up even higher.
Click here to open my first submission to the OFT (pdf file, 28 pages, 9th April 2005)
Click here to open the OFT's response (pdf file, 2 pages, 26th April 2005) reconstructed from scan.
Click here to open my second submission to the OFT (pdf file, 16 pages, 28th June 2005) attachments not included.
Click here to open the second response from the OFT (pdf file, 2 pages, 10th August 2005) reconstructed from scan.
Click here to open my third submission to the OFT; a letter requesting a market study (pdf file, 9 pages, 9th September 2005)
Click here to open a description of my exchanges with the OFT between September 2005 and June 2006 (pdf file, 3 pages, 9th June 2006)
Click here to see the antitrust case for the US market (Posted 3rd August 2006)
The book: Performance and Reward
Click here to view the book on the publishers website. Google Preview is available through this site, allowing you to read most of the book and to search its pages.
Click here to view the book on Amazon.co.uk. From this site it is possible to search the pages of the book.
Click here to view the book on Google Books. It is possible to read most of the book from this site using a larger window than in Google Preview.
Performance and Reward was published in April 2006. The book reviews typical executive pay practices in the UK and highlights the problems that these cause. It also shows how the problems can be solved.
Most of the book is concerned with a detailed examination of the incentives arising from a typical executive reward package. Unfortunately the incentives are seldom properly focused on the creation of long term shareholder value. Short term, individualistic incentives are far too common, and the book shows how damaging these can be. The book proposes a new executive pay structure called a FILLIP, which ensures that executives have incentives to create shareholder value in the long term.
The last part of the book is concerned with the level of executive pay. It explains how the current very high levels of pay have come about and examines some of the problems that these have caused. The book highlights the limitations of a comparative approach to setting executive pay. It encourages remuneration committees to consider the leadership message that is conveyed by the level of executive pay.
The book is important reading for anyone directly involved in executive pay policy. Members of remuneration committees will find it particularly useful, although all directors of listed companies need to be aware of its main points. Activist shareholders, consultants, lawyers, accountants and regulators concerned with executive pay will find in the book an essential critique of current practice and constructive suggestions for making improvements.
Click here to view the book on Amazon.co.uk. From this site it is possible to search the pages of the book.
Click here to view the book on Google Books. It is possible to read most of the book from this site using a larger window than in Google Preview.
Performance and Reward was published in April 2006. The book reviews typical executive pay practices in the UK and highlights the problems that these cause. It also shows how the problems can be solved.
Most of the book is concerned with a detailed examination of the incentives arising from a typical executive reward package. Unfortunately the incentives are seldom properly focused on the creation of long term shareholder value. Short term, individualistic incentives are far too common, and the book shows how damaging these can be. The book proposes a new executive pay structure called a FILLIP, which ensures that executives have incentives to create shareholder value in the long term.
The last part of the book is concerned with the level of executive pay. It explains how the current very high levels of pay have come about and examines some of the problems that these have caused. The book highlights the limitations of a comparative approach to setting executive pay. It encourages remuneration committees to consider the leadership message that is conveyed by the level of executive pay.
The book is important reading for anyone directly involved in executive pay policy. Members of remuneration committees will find it particularly useful, although all directors of listed companies need to be aware of its main points. Activist shareholders, consultants, lawyers, accountants and regulators concerned with executive pay will find in the book an essential critique of current practice and constructive suggestions for making improvements.
Labels: Book, performance, reward
What can be done?
If you are interested in executive pay policy or serve on a remuneration committee then you should read the book. Use the link "View the book" on left.
If you are a private investor you could ask a question about executive pay at a company Annual General Meeting. You could ask:
If you are a private investor you could ask a question about executive pay at a company Annual General Meeting. You could ask:
- Given that sharholders are interested in the long term growth in value, why does the company operate such a generous annual bonus scheme based on one year targets?; or
- Has the remuneration committee examined the possibility of implementing a FILLIP structure for executive pay, as described in the book "Performance and Reward"?; or
- Does the company's remuneration policies provide any evidence that the directors are more concerned with creating value for shareholders than they are with their own personal rewards?
- Ask your MP if he or she supports an Office of Fair Trading investigation of executive pay.
- Ask your trade union whether it lobbies on executive pay, and whether it is aware of this website.
- Write letters to newspapers about executve pay.
- Tell your friends about this website.
About Me
I have 16 years of experience working in larger FTSE 100 companies. My experience covers utilities, regulated networks, commodity markets and oil and gas. I have worked in India and Brazil, as well as the UK.
I have been interested in executive pay since my own reward package was changed in the year 2000. The incentive regime after the change was much worse than it had been before. I could not understand why the change had been made. This caused me to start researching executive pay.
I left industry in November 2003 and concentrated on writing the book "Performance and Reward". I also trained for ordained ministry in the Church of England. On 2nd July 2006 I was ordained deacon in Birmingham Cathedral and started full time work as an Assistant Curate in the Parish of Solihull. I consequently have less time to devote to this blog! I was ordained priest on 3rd June 2007.
My e-mail address is gerard@solihullparish.org.uk .
I have been interested in executive pay since my own reward package was changed in the year 2000. The incentive regime after the change was much worse than it had been before. I could not understand why the change had been made. This caused me to start researching executive pay.
I left industry in November 2003 and concentrated on writing the book "Performance and Reward". I also trained for ordained ministry in the Church of England. On 2nd July 2006 I was ordained deacon in Birmingham Cathedral and started full time work as an Assistant Curate in the Parish of Solihull. I consequently have less time to devote to this blog! I was ordained priest on 3rd June 2007.
My e-mail address is gerard@solihullparish.org.uk .
