Companies urged to look closely at directors’ pay

Shareholders
will be able to draw comparisons between directors’ pay and bonuses and the
actual profits made by UK companies, if DTI proposals come into force. By Katie
Hawkins

Directors
of the leading companies in the UK are once again being accused of being fat
cats.

Executive
directors were awarded median salary increases of 8 per cent last year – more
than double the increase received by staff generally and nearly three times the
current rate of inflation.

The
bonuses were generous too. Chief executives of the top 30 companies in the FTSE
100 received a median bonus of £200,000, according to research released earlier
this month by Executive Remuneration Review.

The
research also shows that chief executives of the largest UK companies took home
a median of £800,000.

The
directors of Marks & Spencer, BT and Tesco have all been in the spotlight
recently with massive pay awards.

Tesco,
for example, set a record for pay to top directors last year with three board
members being awarded salaries of more than £1m.

The
high price of talent in the City is widely known, and many HR professionals are
not surprised by these pay scales.

But
research by PricewaterhouseCoopers now suggests that eight out of 10 directors
are still receiving bonuses for substandard performance. This is despite new
guidelines by the Association of British Insurers calling for tougher
performance targets for the awarding of bonuses.

The
PwC report, Sharing in the Boardroom, is calling for companies to be more
transparent over directors’ pay to reassure shareholders and staff. It found
that a lack of information concerning company remuneration schemes means that
shareholders are finding it impossible to establish a clear link between
directors’ pay and performance.

The
report shows that in most cases, targets of only 2 per cent must be reached for
earnings-per-share bonuses to kick in.

Carmen
Burton, HR executive manager of accountancy firm the Norton Practice, questions
the automatic awarding of bonuses. She believes they should be awarded on a
"project finished, targets met" basis. She said, "I don’t think
they should be given a bonus just because of the position they’ve got."

The
Institute of Directors addressed the issue in its submission to the DTI on
directors’ remuneration in 1999. "More needs to be done to devise
challenging criteria to link performance to pay, especially over the long
term," it says.

"Companies
need to heed public criticism of the pay and performance link, even if it was
merely an issue of badly presented information."

The
Government’s response has been strong. It has threatened to introduce
legislation to force companies to reveal all the details of remuneration
policies for senior executives.

Earlier
this year, Trade and Industry Secretary Stephen Byers announced plans to force
companies to disclose directors’ bonuses in their annual reports, and the
measures are likely to become law later this year, if Labour wins the General
Election.

In
accordance with the DTI’s proposals, employers will have to publish a
remuneration report within their annual report and include a performance share
graph that will allow shareholders to see the link between performance of the
company and directors’ pay.

Chris
Matchan, group HR director of Pentland Group, believes it would be a positive
step. He said, "We are working in an age of constant change and
uncertainty, but we have reward and compensation systems that are rapidly
becoming redundant and we need something new."

But
some HR professionals believe this would be a step too far. Burton said,
"I think it would seem to be interfering in the way companies run their
own business.

"If
they are not publicly owned organisations, then I don’t see why they should
divulge that information."

The
CBI believes that responsibility should rest with shareholders.

A
CBI spokesperson said, "It is a shareholders’ debate. They are the ones
who are responsible, and if they feel there’s a problem, they need to raise it."

The
PricewaterhouseCoopers report urges companies to review their remuneration
policies and to disclose practices to ensure they can stand up to scrutiny.

They
will also need to examine how far their declared policies are being effectively
implemented when executive pay packages are determined.

It
cites the ABI’s support of the use of independent auditors to scrutinise the
process.

Graham
Ward-Thompson, partner at PwC and author of the report, said, "Companies
say they must have directors’ pay that is comparable to their competition, but
they give very little information, if any, about who their comparators
are."

He
added that the DTI’s proposed legislation would make them explain how they are
benchmarking themselves.

Seventy-seven
per cent of companies do not use a comparator in their annual bonus schemes, he
said.

Pressures
for transparency are likely to increase on companies’ remuneration committees,
claims the report.  

www.iod.co.uk

www.pwc.global.com

Failure
to ask staff for views weakens system

The
motivational effects of bonus schemes are being undermined by employers’
unwillingness to consult their employees on how they are designed, claims
research by the Industrial Society.

The
report, called Bonus Payments, shows that while 70 per cent of the employers
surveyed operate a bonus scheme, union or employee representatives are
consulted in only 15 per cent of cases.

More
than half of the 1,100 HR professionals who responded to the survey did not
know how long their bonus scheme had been in place and many schemes were poorly
designed and infrequently revised.

The
survey also reveals that the criteria used to set the level of bonus payments
was a grey area to many respondents. Of those who did know, 63 per cent
indicated that sales profits were the main criteria.

Senior
executives are most likely to be covered at 66 per cent, followed by the sales
force.

Will
Hutton, chief executive of the Industrial Society, said, "Bonus payments
should be good motivational tools, but our survey shows that too often they are
being poorly designed and managed.

"Designing
bonus schemes collaboratively with all stakeholders from the outset is a must
if they are to have workers’ ‘buy in’ and any chance of success."

Comments are closed.