Pay has gone astray

It’s time to try something different in executive pay. Almost 30 years of well-meaning reform has left us with a plethora of incentive schemes for executives embodying increasingly numerous targets, and voluminous commentary and data on remuneration in annual reports, much longer than reporting on employees, climate change or other far more significant ESG issues.
We hugely doubt that most executives pay much attention to their incentives until it comes close to a calculation point, belying the idea that there is any long-term incentive effect, and making a mockery of attempts to ’reform’ the system by adding even more targets into schemes. And in a world where executives are routinely compensated for forfeited incentives when they switch company, retention doesn’t even come into it.
Yet pay continues to be a major topic of shareholder engagement, taking up huge amounts of company and investor time for little benefit. Companies repeatedly find themselves in hot water because schemes designed to be ’long term’ end up paying out at an inappropriate time. And when they try to take account of events they get caught in the calculus of controversy. How much of their variable pay should an executive lose if their company destroys historical sites, or if there are fatalities at work? The Covid-19 crisis will only set more challenges for this model.
The status quo is rotten, yet companies and investors have been unable to overturn it, returning to the same old ideas of ’alignment’ and ’incentivisation’ and sticking more targets into executive schemes. In an era of pandemic, inequality and the existential threat of climate change, this is simply not enough. And in a year where thousands of working people have continued to do their jobs – without any expectation of any bonus or share award – in the face of a major public health risk, we owe it to them to do something better. This week we begin consulting clients and companies over our ideas for a fundamental overhaul of directors’ pay, putting the emphasis on a greatly simplified model. In PIRC’s view this should be based primarily on salary and the expectation executives should perform the duties expected of them under company law. A fair day’s pay for a fair day’s work like any other employee would expect. We propose a significant shift away from current practice and major reduction in variable pay.
We do not expect change to come quickly while too many are happy to do things the way they have always been done. But we do think many directors and investors share our perspective, even if currently they feel unable to speak out. So we start the process of change now, and call on others who see the futility of continuing on the same path to join with us.
Read more here.

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