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executive pay levels add weight to minister's words

December 1999

The UK government has been handed more ammunition in its campaign against high levels of executive pay by a study that shows financial rewards for directors in Britain bear no statistical relationship to company performance.

The annual Directors’ Pay Report, published by the London-based private research company Incomes Data Services (IDS), shows that even the part of most directors’ pay package that has the clearest direct link with short-term corporate performance – annual bonus payments – ‘showed a weak relation with changes in pre-tax profit’.

IDS concludes that this year’s pay increases ‘will provide little support to those who believe that no more regulation is needed’.

It says recently agreed corporate governance codes were thought to have laid public and government concerns on pay to rest, ‘but just as quickly as new codes of practice are put into effect, it seems new guidelines are required.’

The report, which analysed salaries, bonuses and long term incentive plans and benefits of nearly 2000 directors in Britain’s top 350 listed companies, found that in 57 companies where pre-tax profits went down, 32 chief executives received increases in both basic salary and total cash. It also found that:

nearly a third of chief executives received total cash rises of more than 20 per cent

only nine companies out of 334 provided the level of pay and performance disclosure that the government would like to see

28 companies granted ‘super options’ to executives, which could be four times greater than their salaries.

Trade and industry secretary Stephen Byers has said he wants to see ‘world class players’ rewarded with ‘world class levels of pay’, but in a consultation paper issued in July he argued that the links between directors’ pay and company performance should be strengthened and executive pay levels made subject to more shareholder scrutiny.

The IDS survey has been backed up by a study on executive share schemes from Pensions and Investment Research Consultants (PIRC), which reveals that two-thirds of share option schemes reward executives even if their company’s shares only grow in value at the same rate as GDP.

‘Most of these performance targets do not represent world class performance as the [UK] government wants,’ said Stuart Bell, research director at PIRC.

lSetting the performance thresholds at these levels tells directors that average is good enough’, he added.

Speculation is growing that next year the Accounting Standards Board is likely to call for tight controls on the use of share option schemes.




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