Link exec pay to non-financial measures

British companies should link at least half of top executives’ performance-related pay to broad measures of success in order to avoid the risk of business decline, according to a report by the High Pay Centre.

Its Paid to perform? report found that firms are failing to link important areas of non-financial performance that improve long-term success to chief executives’ pay. It demonstrates how customer satisfaction, employee engagement and public reputation are vital to business’ long term interests; shows the impact of corporate social performance in improving growth prospects in an increasingly globalised economy and argues that, while cost cutting is sometimes justified, developing great products and brands can be the key to long-term sustainability.

Company priorities, as reflected in executive pay incentives, must reflect a longer-term outlook, or British businesses will suffer in the face of overseas competitors with more sustainable business models.

Paid to perform? calls for:

  • Businesses to link at least half of chief executives’ performance-related pay to non-financial yardsticks.
  • The introduction of mandatory reporting on social and environmental  performance.
  • New tax and procurement incentives to encourage companies to focus on wider measures of performance.
  • Requirements for pension fund trustees, investment managers and commercial pension providers to take into account the social/environmental impact of their investments on beneficiaries.
  • Employee representatives on company boards, to challenge decisions based on short-term financial considerations that may jeopardise the company in the long term.

The report also showed how total shareholder return (TSR) is used to calculate at least one element of performance-related pay by 74 out of FTSE 100 companies, with 96 companies using either TSR or earnings per share, or a combination of both to determine performance for their chief executives’ long-term incentive plan.

Most companies pay little or no regard to the long-term benefits of non-financial performance across areas like employee engagement, corporate social responsibility and customer satisfaction.

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High Pay Centre director Deborah Hargreaves said: “British business will erode its competitive edge even further if it doesn’t start looking beyond share prices and reward executives for their success in fundamental areas of non-financial performance.

“We’ve got to start taking a longer-term view and that means persuading business that performance in areas like corporate social responsibility, employee engagement and customer satisfaction rates are the key to lasting business success.”