Performance-related pay is a nonsense

2003

Executives in most FTSE 100 companies are still receiving performance-related incentives even when they fail to perform.

Research by executive compensation consultancy, Halliwell Consulting has found that more than six out of ten FTSE 100 companies offer long term incentives, often worth more than twice a Directors salary, on the basis of profit growth performance.

But eight out of ten of these firms - 43 companies - have ‘incentives’ which will be given to Directors even if they fail to meet analyst expectations.

The link between pay and executive performance was a "nonsense", Halliwell said. "If this pay is so easy to receive shouldn't it really be called salary and not 'performance related pay' or 'incentives'?"

On average companies begin to pay their Directors 'performance related pay' when they deliver just one third of the profits growth the market expects.

Halliwells’ figures show that while the average pay scheme 'expects' FTSE 100 companies to have increased their profits by 19 percent in 3 years time, City analysts 'expect' companies to have increased their profits by and average of 56 percent over the same period.

Only eight companies in the FTSE 100 award 'performance related pay' only for performance above what the market expects.

BG has the 'toughest' performance related pay regime with directors needing to exceed market expectations by 80 percent before any pay is received. In contrast, Amvescap directors need to deliver just one 20th of the markets expectations.

According to Halliwell, the findings make it clear that FTSE 100 companies do not know how to set their pay schemes so that they pay for performance.

"Since shareholders approve these pay schemes,” the report says, “why are they prepared to pay directors for failing to meet their expectations? - do they really care about paying for performance?

"Directors have conflicting priorities,” it continues. “They know what the City expects but know they get paid in any case!"