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Hay Group study finds FTSE 350 non-executive directors believe executive reward is too high

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As media and shareholder scrutiny of top pay gathers pace, non-executive directors (NEDs) at the UK companies have agreed “executive reward is too high”, according to a study by from global management consultancy, Hay Group.

In addition Hay Group's findings have revealed, NEDs express serious concern that remuneration committees are not effectively linking pay with business performance.

Hay Group's = study, The Trouble With Executive Pay, interviewed 60 NEDs currently serving on FTSE 350 remuneration committees. This is the first to examine the views of this particular stakeholder group in detail.

Almost three quarters (73%) of NEDs agree with the popular view that remuneration is too high.

The majority (87%) state that executive reward needs to change but there was no consensus view on the nature or extent of the changes required.

Jon Dymond, director at Hay Group, said: "More astute committees are starting to realise that forever chasing the median is not the answer to setting executive pay. Rather a more bespoke approach to reward, better shareholder engagement and more effective communication are sorely needed."

High executive pay is not the only point of concern and many NEDs say that committees are failing to link pay to performance.

Almost nine in ten NEDs (87%) state that the connection with performance is insufficient, with the majority (56%) agreeing that remuneration committees have become less effective at linking pay with performance for senior leaders.

"When performance is good, we want to reward. When performance is poor, we want to encourage," one interviewee explained: "Frankly, we need to toughen up."

Dymond added: "Performance is about more than generic financial metrics and short-term share price outcomes. Remuneration committees need to take a clear view on what performance means for the specific organisation given its maturity, sector, strategy and culture and then develop incentive plans that align to that vision.

"There is always a trade-off between pay for performance and the retention of executive talent but committees need to consider this much more explicitly.

"The two things that all parties - investors, NEDs and executives - seem to agree with is that pay needs to reflect the nature and circumstances of the organisation and that high pay is only justified by high performance.

"This could be the foundation for a new, better approach to executive pay. However it will mean a change in behaviour on the part of committees with external pay comparisons taking a much less prominent place than hitherto."