· 1 min read · Features

Executive pay: An academic perspective

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Ruth Bender, reader in corporate financial strategy at Cranfield University School of Management, on developments in executive pay

“There are two problems with executive pay – the level, and the complexity. Each drives the other: to get around the perceived unfairness of very high pay, companies have introduced more and more mechanisms to link it to performance, and the increasing number of incentive schemes has driven overall remuneration levels continually higher.

“It is difficult to see a way out of this impasse, but two recent developments might be an influence: investor engagement and disclosures in the strategic report.

“The ‘shareholder spring’ of 2012 produced many headlines, but little immediate action. However, it is interesting to note that executive pay does seem to have reduced since then. The Manifest/MM&K annual pay survey shows that although base salaries have risen, the average total remuneration awarded for FTSE 100 CEOs fell in both 2012 and 2013 (by 5% and 7% respectively). One explanation for this fall is the impact of increased shareholder engagement on remuneration, combined with the fact that investors now have a binding vote on remuneration policy. This should be encouraging for those who want to see change.

“However, it is worth noting that other pay surveys, using one of several different ways of calculating ‘total pay’, show overall rises in these years, not falls. This again is an outcome of the complexity of executive pay, with deferred and contingent or performance-related remuneration being awarded and paid in different years.

“The other development potentially affecting executive pay is a regulation, introduced in October 2013, which states that companies must produce a strategic report. This strategic report is embedded in an annual report that enables shareholders to assess the business, its performance and prospects, its strategy and business model, and its governance and directors’ remuneration. The required content of the strategic report includes, inter alia, information about key performance indicators and why they are appropriate.

“A specific aim of this annual report format is that linkages and interdependencies between various parts of the annual report should be highlighted. So a clear link will be made between the remuneration report, showing the performance measures used in determining directors’ pay and the key performance indicators in the strategic report. Given the further need to disclose the company’s performance in context against its objectives, we should see a closer link made between performance measures and strategy, providing investors with a deeper insight into the company’s remuneration policies, which of course are now subject to a binding vote.”