Employers shift compensation focus to longer-term reward

Employers are changing their compensation frameworks to encourage employees to focus on the organisation’s medium- and long-term performance.

Last month, UBS became one of the latest employers to do so. The bank’s Fourth quarter 2012 report outlined measures to enable staff to benefit from its long-term success.

These include the introduction of multi-year performance conditions on equity-based deferred compensation and a reduction in the maximum amount of immediate cash paid as performance awards.

Luke Hildyard, head of research at the High Pay Centre, said employers should emphasise longer-term timeframes for compensation and bonus structures. “Non-financial performance measures, such as employee engagement and customer satisfaction, which are better indicators of an organisation’s long-term prospects than headline figures such as profit or share price, should also be welcomed,” he said.

Also last month, advertising firm M&C Saatchi announced share awards to four executive directors under its long-term incentive plan (L-tip), which vested on 31 December 2012 after three years. The awards reflect the meeting of targets for share price performance and shareholder return conditions.

L-tips are commonly offered as a form of executive compensation. However, a discussion document published last month by Hermes Equity Ownership Services (EOS) and the National Association of Pension Funds, among others, called for a major rethink on executive pay to align it more closely with an organisation’s long-term goals. The report said the standard three-year vesting period for L-tips should be considered medium-term at best.

Jennifer Walmsley, director and head of UK engagement at Hermes EOS, said: “Employers need to think about what long-term really means in the context of their business and look to shape their remuneration arrangements to fit that.”

Employers should also think about succession planning. “If you have executives who know they are going to have a stake in the organisation they are managing for 10 years or more, then that will motivate them to think about who is going to come next,” added Walmsley.

“If you look at what has happened with the banks, for example, there is a lot coming out now that stems from decisions that were taken quite some years ago. If the individuals who were chief executives at the banks five, six or seven years ago were today still holding substantial amounts of shares in those businesses, you could see how the knowledge that that was going to be the case could have caused them to act differently.”


Changing timeframes

  • Employers should emphasise long-term timeframes for compensation and bonuses.
  • Long-term incentive plans (L-tips) with three-year vesting are medium-term at best.
  • Employers need to think about what long-term means for their organisation.