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Longer term, CEOs more likely to be rewarded on share price performance,

Longer term, CEOs more likely to be rewarded on share price performance, whilst over the short term, share price is ignored – Harvey Nash / London Business School MBA Consulting Team

FTSE 100 CEOs who served continuously in the lead up to, and through, the downturn, are more likely to be penalised for poor share performance, and rewarded when it improves. This is according to research carried out by the Harvey Nash Board Practice, and the London Business School MBA Consulting Team.

The research found that during the period Jan 2, 2006 and Dec 31, 2010 changes in share price explained about 30% of the variation in direct pay of the CEOs, suggesting that it takes longer to judge the contribution CEOs make to the performance of the company, a critical factor to be considered by Non Executive Directors when setting the compensation of the CEO.

The research also revealed that Consumer and Retail organisations had a much higher correlation between CEO pay and share performance than other sectors. About 20% of the change in direct FTSE 100 CEO pay can be explained by share price performance.

Although numerous reports have seemingly failed to show a correlation between CEO pay and share price performance, many of these studies fail to differentiate between the mainly global FTSE 100  companies and small to medium sized enterprises which have their trading activities mainly  here in Britain. 

LondonBusiness School’s MBA consulting team’s research reveals that correlations do exist, but in very specific circumstances. Factors such as the size and scale of a company, its sector alignment and even the length of service of its CEO are all important in attempting to draw firm conclusions.

When looking at the data on a short-term, year by year basis, the correlation was significantly less, with less than one per cent of changes in CEO pay being explained by share price performance.

Albert Ellis, CEO of Harvey Nash comments,

“The results are striking.  They show very clearly that there are significant factors other than share price performance which come into play when Non Executive Directors set CEO compensation and incentives.

The most important finding is that successful FTSE 100 CEO pay in the longer term appears aligned with the success and performance of the company as reflected in the share price over time. Churn at the top of large companies has increased as a result of the financial crisis and therefore there is little or no correlation between remuneration and share price performance in the short term in these organisations. 

The top 100 companies listed on the London Stock Exchange are not representative of British business in general. Increasingly London has become one of the most successful capital markets for large global companies, many of whom employ CEOs, Executives and Non Executive Directors from all over the world. It stands to reason that in seeking to attract the very best talent available anywhere in the world to run some of the world’s largest and strategically most important companies to the global economy, Boards must offer compensation packages with international purchasing power in either US Dollars or Euros. In addition they must compete with the US, Europe and increasingly now Asia on attractive long term incentive packages. Even “British” FTSE 100 companies BP, Vodaphone Marks & Spencer and Lloyds Banking Group all employ CEOs who are not British born nationals, neither do they live in the UK full time.

When it comes to pay, the distinction between FTSE 100 and small to medium sized British business is also clear. Small to medium sized British businesses are more likely to align their CEO pay with performance even whilst battling extremely challenging market conditions in their home market. Findings taken from the Manifest/MM&K Director Remuneration Survey 2011 show that total remuneration in smaller companies has not grown as fast as in the largest companies.

As the UK’s largest publicly quoted head hunter we have worked with our clients throughout the downturn, advising them on Board and Executive appointments, their remuneration and long term incentives. Our experience is that Non Executive Directors are very sensitive to the issues around executive pay and the vast majority particularly in the SME sector have exercised restraint during the financial crisis.

However, let’s not lose sight of the greatest challenge facing FTSE 100 Boards which is to attract and retain talented CEOs who have the experience to successfully grow our companies and provide an important solution to the increasing unemployment problem.

It’s perhaps time for the Business Secretary to calm the rhetoric on FTSE 100 executive pay and direct the Coalition’s resources on getting the real economy moving. Given that all the evidence is that new jobs are created mainly by small to medium sized companies, I call upon the government to focus on measures which stimulate economic growth.”

Tim Ward, CEO QCA comments:

“Delivering growth in shareholder value over the longer term is both art and science. It is clear from this research that setting a single performance measure over the short term does not guarantee the creation of value.  However the research does show the need to set a range of performance measures, that are geared for the longer term, and that are tailored to each business, its strategy and its operations. Remuneration should be a tool to encourage behaviour. We look forward to more research to help Remuneration Committees in different sectors highlight particular drivers of growth.  It is interesting to see that share price performance and CEO pay is more strongly linked in smaller quoted companies than for the FTSE100.”

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