Can pay really be linked to performance?
Authors: Deborah Hargreaves
15 October 2013
Top executive pay has quadrupled in the past 10 years to an average of £4.3 million. This extraordinary rise has taken chief executives’ pay to a multiple of 160 times average wages. During the same period wages have not risen in real terms at all – workforce wages are at 2003 levels.
The divergence has been created by an array of generous bonuses and incentive plans added to the executive’s package. This has all been done in an effort to align executives’ incentives with those of shareholders. So-called pay for performance can be worth up to 700 per cent of salary for a top boss.
But does this really work? Executive pay has increased sharply over the past decade, but company success has not followed in equal measure. It is in any case, extremely hard to determine the contribution of one individual to a complex, modern business.
Chief executives are called “value creators” and cossetted with multi-million pound packages. But this ignores the rest of the workforce, all of whom are contributing to the success of that company. In fact, it is in an executive’s interest to hold down workforce costs in order to boost the share price on which some of his own pay-outs are based.
Some shareholders are beginning to question the effectiveness of performance pay. Under new rules brought in by the coalition, they now have a binding vote on company pay policy every three years. This policy will have to include details of bonus and incentive plans and how they are linked to performance.
The High Pay Centre is challenging the issue of performance pay. Is it really appropriate to encourage our top businessmen to reach for the jackpot in this way?
I will be participating at The Work Foundation event with The Rt Hon Dr Vince Cable MP to put forward our views on this issue on 18th November.
We will also be holding a debate with speakers including Sir Philip Hampton, chairman of RBS, and Stephen Bevan from the Work Foundation.
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