Under-performing CEOs hide behind their bonuses

2008

New British research has questioned the assumption that if you want a high-performing leader for your high-performing organisation you'll need to pay for it. In fact it makes little odds whether you pay your chief executive the earth or require them to wear a hair shirt.

Research among FTSE-100 companies by corporate remuneration consultancy Patterson Associates has suggested that average total pay for a FTSE-100 boss has risen by 10 per cent to £8.9m over the past year, against a 21 per cent fall in the share index.

And, while long-term incentive plans (LTIPs) are used as way of improving performance, remuneration committees often used bonuses and salaries as a "filler" for underperformers, it argued.

Under-performers generally made up for their performance by paying higher salaries, with the average salary for winners (or those delivering 10 per cent or more value appreciation) being £3.8m, against £4.5m for under-performers.

Under-performers also paid more bonus as a proportion of the whole, it argued, with the average bonus for a winner being £3.1m but £4m for underperformers.

The study cited the example of Reckitt Benckiser, where shareholders had paid close to £52m over five years to its chief executive to secure a £270 return on an initial investment of £100.

By comparison at Imperial Tobacco exactly the same return had seen its chief executive take home about £8m, meaning the cigarette giant's shareholders got six and a half times more value for their money.

Intriguingly, given the credit crunch, banks were among the poorest performers in the index, accounting for four of the worst 15 companies by shareholder return.

The research also suggested that how salaries climbed at companies with a higher turnover of chief executives.

Those with four bosses over the past five years reported a median salary of about £6m, while those with the same chief executive for the whole period paid out £4m.

"We conclude that LTIPs are clearly driven overall by performance – a very good thing – whereas other elements of pay (salary, bonus) sometimes serve as a 'filler' for under-performers – ensuring that those whose LTIs are likely to fail, or partly fail to pay out, receive compensation in other ways," argued founder Simon Patterson.

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