Long-term incentive plans (L-tips) should be scrapped for executives, and performance-related pay should be given in cash rather than shares, to prevent executives from benefiting from sudden increases in the share price caused by external factors, according to research by The High Pay Centre.
Its No routine riches: reforms to performance-related pay study, which was based on interviews with 1,000 employers, also found that L-tips have driven up executive pay to unwarranted levels without delivering a corresponding increase in workplace performance.
The research also found:
- L-tip payments to FTSE 350 directors increased by more than 250% between 2000 and 2013, which is roughly five times as fast as returns to shareholders.
- Remuneration committees that set executive pay should be diversified to ensure committee membership reflects a wider range of professional backgrounds.
Deborah Hargreaves, founding director of The High Pay Centre, said: “Performance-related pay has failed on its own terms. It doesn’t encourage or reward good business performance.
“The only effect it has is to make executive pay packages more complex, less aligned with the interests of the organisation and much, much bigger.
“This has become a real threat to public trust in business. Too often, what ought to be good news stories about organisations employing thousands of people and generating healthy profits, are undermined by provocative and disproportionate pay packages to just one or two individuals at the top.”