Better ways to let executives cash in

17 May 2015 - 02:00 By ANN CROTTY

Abolish long-term incentive plans, pay cash only and broaden the diversity of remuneration committees. These are some of the far-reaching recommendations of a report by the High Pay Centre, an independent think-tank that monitors executive pay in the UK. As South African remuneration committees and consultants have largely followed the trends set in the UK, the recommendations for fixing a system that is out of control are equally valid for this country.The report, "No Routine Riches", after a year-long inquiry into performance-related pay for executives, said the system of awarding executives has become increasingly complex, pushed directors' pay into the stratosphere and has little discernible link with corporate success.Of perhaps greater concern is the increasing evidence that the award system is damaging the economy. The report referred to research by economist and Financial Times columnist Andrew Smithers that argues that performance-related pay schemes inadvertently encourage and reward short-termism.A company faces a different time horizon to individual executives. Executives are most concerned with the performance metrics affecting their performance-related pay, which tend to be at most three to five years. This is inappropriately short when considering possible returns on major investment projects. Such projects, which may be crucial to the long-term sustainability of the company and the health of the economy, often negatively affect short-term profitability. This short-term impact would reduce payouts to executives and so discourage them from investing."Current performance-related pay plans encourage executives to slash investment - either in equipment or human resources - to a potentially unsustainable level, while pursuing speculative takeovers and concentrating resources on share buybacks to increase the share price and increase the bonus or LTIP [long-term incentive plan] payouts," said the centre.Smithers said UK business investment had declined since the '90s, coinciding with an increase in the value of executive performance incentives.Deborah Hargreaves, the centre's executive director, said theremuneration system needed major reform. But she cautioned that previous reform attempts were unsuccessful - even propelling remuneration to higher levels. In the early '90s, then-US president Bill Clinton's tax-based efforts to curb generous pay resulted in an increase in the use of share options, now a major source of enormous executive wealth.As for paying cash only, this would simplify the process and allow everyone to see the value involved.Broadening the remuneration committees' diversity would help to ensure more critical challenging of remuneration policies. "The notion that executive pay practices represent the market rate for the individuals in question is fatally undermined by the indirect conflicts of interest ... hindering the judgment of remuneration committee members who are themselves company directors," said the centre...

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