Long-term incentives failing to meet the needs of executives and shareholders

Long-term incentives at many top UK companies are failing to meet the needs of executives or shareholders, forcing some organisations to make constant adjustments to their reward plans, new research suggests.

The report, Executive Compensation Review of the Year 2006, compares how different types of long-term incentive plans align executive pay with returns delivered to shareholders.

Traditional compensation models give outstanding reward for outstanding performance but can give rise to anomalies where performance is anything less than stellar, the report by consultancy PricewaterhouseCoopers (PwC) said.

The report shows how two FTSE100 companies delivering similar returns to shareholders over a decade can have an average level of reward that differs by a factor of five.

Tom Gosling, executive compensation partner at PwC, said: “Our research shows that commonly used designs are often not hugely successful at aligning executives’ pay with how well they perform for shareholders over a sustained period.
  
“At the same time, some plans are just too complex, meaning they can be severely undervalued by executives and, in our experience, often discounted altogether. In many cases, they are not effective in encouraging executives to perform better.”
 
The research shows that a focus on stock ownership rather than performance conditions may provide a more effective system of reward. In many circumstances, a better alignment of reward and shareholder value can be achieved by simply delivering more of an executive’s total pay in company shares and requiring them to hold this stock for a significant period of time.

The report also found that the UK’s top CEOs saw their salaries rise by an average of 6% last year, compared to a high of 14% in 2000.

 

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