Research Reveals: CEO overpaid?

The compensation of executive is still decided by simple criteria that demonstrates little relation with the long-term performance factors for a given company. This trend was concluded by an examination of compensation at a sampling of FTSE 100 organizations last decade. Research from CFA UK and Lancaster Business School, which analyzed executive pay over a decade from 2003-2013 at 30 FTSE 100 firms, found that there is hardly any link amid the key performance marks that firms related to stakeholders and the parameters applied to incentivize and reward senior employees.

Most of the discussions regarding executive pay concerned the size of bonus payouts, while the more crucial question revolves around performance measurements and how they are assessed and accordingly incentivized. The study observed that senior manager pay denoted reflected little connection with the firm’s performance, irrespective of the particular parameters of performance applied.

A large part of CEO compensation seems to have no link to episodic value generation, though comparatively unsophisticated performance parameters such as earning per share and return on equity, kept dominating the parameters by which management performance was assessed during the time.  Value-based structures that linked performance to the value of capital were seldom used. Income per share can be geared by, for instance, M&A processes that do not guaranteed improved revenue.

The report reveals that the risk of over-confidence on such parameters of managers performance were well-documented, including investment myopia, income manipulation, reckless risk-taking and threats to organizational culture. The need to better link executive compensation and lasting performance was one of the suggestions by Professor John Kay who explored these trends in the United Kingdom in 2012.

Although existing pay policies featured visible problems, the report mentioned that remuneration policies have become more transparent and fair. The process for change, however, is just beginning.  Journalists have observed how financial services providers, specifically those from the banking sector, employ methods such as balance scorecard to estimate performance. This approach leverages a mix of both monetary and non-monetary structures that are related to the strategic aims of the company, while analyzing a range of risk parameters.

There were several challenges to high compensation of managers of FTSE 100 firms in 2014. For example, stakeholders in luxury group Burberry voted against a £20m remuneration for executive Christopher Bailey. Barclays, AstraZeneca, Pearson, Reckitt Benckiser and WPP similarly have faced challenges to high executive pay.

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