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Shareholders should scrap LTIPs for gauging corporate exec pay, says major report.

Little link to corporate performance and possible danger to shareholders, according to result of year-long study.

Executive remuneration increasingly based on bonuses and Long Term Incentive Plans (LTIPs) has not demonstrated a clear link to company performance, is unlikely to, and may be damaging to companies, shareholders and the broader economy, warns a report from the UK High Pay Centre.
The major report, titled: No Routine Riches is the result of a year-long inquiry by the independent think tank. It recommends that LTIPs should be abolished, that executive remuneration should be paid in cash only, that wider company health criteria should be employed in any bonus calculation, and that remuneration committees should be tightened via a more diverse range of members. On the last point, it says there is little incentive for remuneration committees to get tough on pay/performance, reporting that the average FTSE 100 Remuneration Committee member was paid nearly £450,000 a year, roughly 16 times the average UK worker, while the highest was paid £9m. On LTIPs, it claims there is little link to shareholder returns, that the metrics are susceptible to ‘gaming’, and are endangering long-term investment by companies and the productivity of the UK economy. LTIP payments to FTSE 350 Directors, it says, increased by over 250% between 2000 and 2013, roughly five times as fast as returns to shareholders. Its analysis of the ‘single figure’ for the Chief Executive’s pay declared by FTSE 100 companies in their annual reports suggests that the average CEO was paid almost £5m in 2014 –a five-fold increase since the late 1990s.The Centre says this shows a schism between pay and performance. Furthermore, it says the concept of performance-related executive pay itself is fundamentally flawed because it is impossible to design performance metrics that accurately measure the complex dimensions of a company or an executive’s success.On bonuses, the Centre says research carried out for it shows they increased at roughly double the rate of Earnings Per Share (EPS) and company profits between 2000 and 2013. The High Pay Centre report sought input to the report from respected corporate and investment figures including Simon Walker and Roger Barker from the Institute of Directors, Dr Ruth Bender from Cranfield University, John Plender, the Financial Times columnist, David Pitt-Watson from London Business School, Andrew Smithers of Smithers & Co, and Duncan Brown formerly with Aon Hewitt. Lord Sainsbury, former Chair of Sainsbury’s, the supermarket chain, and a member of the UK House of Lords with the Labour Party, funds the Centre’s work.
Smithers, the respected economist and FT columnist, says in the report that existing incentives measures such as Total Shareholder Return (TSR) and EPS can reward executives for focusing on practices such as share buybacks, cost-cutting and under-investment in order to manipulate performance targets, even when these do not represent sensible business strategy. Under UK regulation changes in the 2013 Business Enterprise and Regulatory Reform Act following uproar in the so-called Shareholder Spring, companies now have to submit their remuneration strategy to a binding shareholder vote every three years. Since then, the report says shareholders appear to be satisfied with executive pay deals.
In 2014, it says a majority of shareholders in just one FTSE 100 company, Burberry, opposed the pay awards of the company CEO in the previous year. As of April 2015, shareholders of only one UK-listed company, Kentz Corporation, have used the new binding vote to vote down an executive pay deal.