Performance related pay for senior executives rarely seems to achieve the returns that it promises, reports Stephen Overell
One of the many useful functions of work is that it provides a way for society to allocate its resources.
Because of their occupations, a baker is worth so much, a nursery nurse a bit less, a management consultant much more and Sir Christopher Gent of Vodafone £5.1m in salary and bonuses and £9.3m in share options. Hopefully, even the great man himself, flushed as he must be with his shareholders' largesse, might agree that the values placed on certain jobs are really very arbitrary.
As time goes by it often seems that such awards are becoming even more arbitrary. With Sir Christopher at the helm, Vodafone lost £13.5bn in the year to March 2002. From a share price peak of 399p, they now languish at around 97p. Of course, the glumness of the telecoms sector is beyond his control. But it still feels like an affront to common sense to learn that 80 per cent of this voluptuous remuneration package was performance-related.
Yes, indeed. According to Vodafone's 2002 accounts, the performance element in senior management packages sits at 80 per cent of the total amount. The rules that determine executive pay are entirely geared towards growth, with such inscrutable measures as one year cash flow, one year Ebitda, one-year ARPU and so on.
As any rational fellow would do, Sir Christopher seeks to maximise his income within the rules set by his remuneration committee. If it wants growth, it gives its managers incentives and viewed historically that is what they have delivered. Value is another matter. It is a question of what companies choose to reward that matters.
Expressed like this, Vodafone's pay policy seems entirely logical in a Kafkaesque sort of way - the shareholders are happy. But to the rest of the world it looks like fumbling in the greasy till by another name.
Over recent years, researchers have been at a loss to find a clear link between pay and performance - as most people would understand it - in executive remuneration.
The directors of FTSE 100 companies, for instance, received an average pay rise of 28 per cent in 2000 - five times as much as the increase in the UK's average wage, according to pay consultants Inbucon1. Overall, 2000 was a good year for the economy - maybe not 28 per cent better than the previous one, but good n