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Paid to Perform? What do we Want our Business Leaders to Achieve?

Paid to Perform? What do we Want our Business Leaders to Achieve?. Luke Hildyard 16 January 2013. Findings. 94 FTSE 100 companies use EPS or TSR to calculate their LTIP TSR used by 74 companies to calculate at least part of PRP (64 companies used EPS)

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Paid to Perform? What do we Want our Business Leaders to Achieve?

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  1. Paid to Perform? What do we Want our Business Leaders to Achieve? Luke Hildyard 16 January 2013

  2. Findings • 94 FTSE 100 companies use EPS or TSR to calculate their LTIP • TSR used by 74 companies to calculate at least part of PRP (64 companies used EPS) • Only 38 companies use specific, measurable non-financial PRP criteria. Only 7 for LTIPs • Most progressive companies have generally undergone massive scandal – BP & the Banks COMPANY PERFORMANCE OVERWHELMINGLY JUDGED BY PROFIT/SHARE PRICE

  3. Accountancy-based measures (like EPS) Market-based measures (like TSR) ‘the market’s collective view was that risks to bank creditworthiness had fallen steadily between 2002 and 2007, reaching a historic low in the early Summer of 2007, the very eve of the worst financial crisis in 70 years’ (Lord Adair Turner) Company accounts ‘are inevitably based on a series of assumptions about the future… accounts provide precise indicators of performance only in as much as they apply precise rules to a set of uncertain events’ (Andrew Likierman, London Business School) PROFIT/SHARE PRICE UNRELIABLE GUIDES TO COMPANY PERFORMANCE

  4. Critical measures of performance: Companies as ‘enduring social institutions’ Employee engagement Brand/ reputation ‘The value that a company creates should be measured not just in terms of short-term profits, but how it sustains the conditions that enable it to flourish over time’ Rosabeth Moss Kanter, Harvard Business Review Corporate social performance Customer satisfaction BEST INDICATORS OF LONG-TERM, SUSTAINABLE SUCCESS ARE NON-FINANCIAL

  5. Manifestation of short-term share price/ profit orientation Action Impact • Ruthless cost-cutting • Debt-fuelled peculation and acquisition • Share buyback (quadrupled in UK since mid-90s) • Reduced business investment (lower in UK than France, Germany & US) SHORT-TERM FINANCIAL PERFORMANCE CAN COME AT THE COST OF LONG-TERM SUSTAINABILITY

  6. Grounds for Action • Taxpayer bears cost of CO2 emissions/inequality • Volatile business environment affects public finances • Millions of people depend on big companies as employer/supplier • Taxpayer is multi-billion/£ customer of big business through procurement budget • Taxpayer contributes 32% of UK R&D funding, & funds other critical infrastructure PRACTICAL & MORAL BASIS FOR WIDER INPUT INTO EXEC/COMPANY OBJECTIVES

  7. Recommendations • Non-financial measures should constitute 50% of PRP • Companies should disclose Environmental/Social performance • Tax rates and procurement decisions should favour environmental/social disclosers • Investment chain should be required to consider social/environmental impact • Employee representation on boards EXECUTIVE/COMPANY PERFORMANCE MUST BE UNDERSTOOD AND EVALUATED IN A WAY THAT REFLECTS ALL STAKEHOLDER INTERESTS

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