Performance and Reward

Current the bigger FTSE companies in the UK manage executive pay very badly. There are two key problems:

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.

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.

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.

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.