New research published in a report by the High Pay Centre and the CIPD shows that despite an increasing interest in ESG (Environment, Social and Corporate Governance) factors, performance‐related pay for FTSE 100 CEOs is still overwhelmingly based on financial returns to shareholders rather than the needs of a range of stakeholders.
To put this into perspective, for every pound a FTSE 100 CEO could earn for meeting an employee‐related target, they could potentially receive £41 for meeting a financial metric.
This is in spite of the fact that the UK Corporate Governance Code states that boards must look at people issues such as organisational culture, diversity, wellbeing and reward of the wider workforce when considering executive pay.
The new research CEO pay and the workforce: how employee matters impact performance‐related pay in the FTSE 100 points to a clear disconnect: while ESG measures are often stated as important in business strategies, they are often omitted from the measures that are considered for performance related executive pay.
The research found that only 34% of FTSE 100 companies used employee‐related metrics in their CEO performance‐related pay package. Among the companies that used these metrics, they typically accounted for just 5.9% of the maximum incentive pay available to CEOs. Across the FTSE100 as a whole, employee‐related metrics accounted for only 2% of maximum incentive pay.
By contrast, all companies analysed in the research use financial metrics linked to shareholder returns for their performance related pay packages. These metrics had an average weighting of 82.4% of total maximum potential incentive pay.
For short‐term annual bonuses, employee‐related metrics typically accounted for 11.2% of the potential maximum CEO bonus awards at the companies that used them.
For long‐term incentive plans (LTIPs), employee‐related metrics accounted for an average of just 9% of the total potential value of the plan at the companies that used them.
The three most used employee metrics for bonuses were: Health and safety (12 companies); Employee engagement (10); and Diversity and/or inclusion (9).
For LTIPs, the three most used metrics were: Employee engagement (4 firms); Conduct/culture (2); Diversity and/or inclusion (2).
The High Pay Centre/CIPD report notes that several studies suggest that the use of environmental and social metrics in CEO pay plans has increased in recent years. However, it remains far from standard practice.
This could be a result of the dominant role that shareholders play in UK corporate governance, approving board appointments and executive pay policies. It may also reflect that while financial measures such as company earnings or returns to shareholders are well understood, there is much less consensus on how to measure performance in terms of good employment practices and corporate culture.
The High Pay Centre and the CIPD, while recognising the importance of financial metrics in measuring business performance, are calling for a broadening out of corporate performance metrics to include employee, societal and environmental measures of success.
High Pay Centre Director Luke Hildyard said: “While treating workers well often results in better financial performance over the long‐term, there are inevitably occasions where the interests of people and profit come into conflict.
“The fact that CEOs are overwhelmingly incentivised to put financial returns first on those occasions shows that corporate culture may be changing very slowly, but it still prioritises investors over workers and wider society”.
Charles Cotton, Senior Reward and Performance Adviser for the CIPD, the professional body for HR and people development, said: “It doesn’t have to be a case of ‘either/or’. Progressive pay and employment practices can comfortably sit alongside and even enhance profitability and financial returns. Everyone stands to benefit from using a broader set of measures to assess company performance.
“We look forward to working with investors, remuneration committees and people professionals to explore what employee measures should be used in which contexts, and how they can be used to inform CEO bonuses and incentives.”
