Third of FTSE 100 firms use employee metrics to calculate CEO bonuses

Just one third (34%) of FTSE 100 organisations use employee-related metrics when calculating executives’ performance-related pay, which is still overwhelmingly based on hitting financial targets.

This is according to the High Pay Centre and the CIPD, which found that for every pound a FTSE 100 CEO could earn for meeting an employee-related metric, they could potentially receive £41 for meeting a financial target.

Their latest report analyses the content of active board-level performance-related pay plans, as detailed in FTSE 100 firms’ latest annual reports.

They found that:

• Only 30% of firms had employee metrics in their executive bonus package and 9% incorporated them into their long-term incentive plan.
• Across the FTSE 100 as a whole, employee-related targets accounted for just 2% of the maximum incentive pay available to CEOs. Financial metrics had an average weighting of 82.4%.
• All of the companies had some form of financial metric in their executive pay plan.

The companies with the highest weighting attached to employee-related metrics were Fresnillo (17%), BHP (11.8%), Polymetal (11.4%), Whitbread (10%) and Centrica (9%).

The three most used employee metrics for bonuses were: health and safety (12 companies); employee engagement (10); and diversity and/or inclusion (9).

Charles Cotton, CIPD senior adviser, said in his foreword to the report: “Businesses often say that their people are their most important asset… Therefore, we could expect most chief executives of the UK’s largest firms to be rewarded significantly for the investments they make in the management, development and reward of their people.

“However, analysis by the High Pay Centre of the targets used by FTSE 100 firms in their CEO bonuses and long-term incentive plans suggests this is not always the case.”

Cotton said some of the responsibility for ensuring fair remuneration sits with investors, as they have the power to vote against remuneration policies that exclude employee metrics.

In 2018, Legal & General Investment Management (LGIM) promised to vote against director reappointments in firms that it perceived were not doing enough to improve gender diversity at senior levels. However, the CIPD and High Pay Centre’s report notes that LGIM did not mention environmental, social or governance (ESG) metrics as a factor to consider when voting on a remuneration policy.

Cotton said the investment community may perceive employee metrics as unreliable and may be unaware about which metrics they should be asking firms to consider when calculating executive reward.

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He said: “There is a role for the RemCo to explore with their stakeholders which people metrics, as well as other ESG measures, should be used to reward, recognise and incentivise senior executives and why.

“The default ought to be that all publicly listed firms should use such measures, but they must also be free to select those that make most sense for their situation. There are implications for the people profession in terms of working with RemCos to help them to produce the right workforce metrics, at the right time and in the right format.”