Rewarding directors and executives

1. Rewarding directors and executives Executive reward tends to attract a lot of attention, prompting emotional as well as analytical interest. Remuneration committees may be appointed to advise boards on how ‘directors’ defined under legislation, together with other senior people in an organisation, are to be rewarded, as well as the substance of reward portfolios. Look at an example of a FTSE top 250 company’s annual report and accounts. A separate and detailed section will be found reporting on – and accounting for – the pay and other forms of remuneration and benefits received by the company’s directors and how this relates to other executives and other employees.

2. Some numbers…* • Financial Times Stock Exchange listed (FTSE) company data on the top 350 directors published in Autumn 2006 by Incomes Data Services (IDS) reveal that just over half the chief executives are earning over £1 million annually, five of them receiving total packages valued at more than £10 million gross. • Average total pay among FTSE-100 chief executives was reported by KPMG in October 2007 at £2.6 million (up from £2.3 million in 2006). • IDS (2006) report that chief executives in the FTSE companies are earning on average 98 times more than all full-time UK employees over the year to July 2006. The report is accompanied by the judgment that this represents the biggest pay gap recorded since the beginning of the decade. • The Guardian’s 2007 executive pay survey describes payments to chief executives as up by 37% over the preceding year, similarly positioning chief executives as receiving ‘almost 100 times more than staff’. Brendan Barber, TUC General Secretary, was reported asking how credible it is to claim that chief executives had become so much more productive than the people under their leadership over the preceding year. • IRS reported that in 2005 UK listed company chief executives’ pay had risen 208% since 1998, while the average all-employee earnings increase over the same period had been 33%. A fall in the FTSE Share Price Index of 13% acted as a proxy pay-performance indicator. * CEO pay makes the headlines: study the detail of all executive rewards in company accounts for context

3. THEORY (a selective overview): • the role of markets: while there are proponents who argue • that ‘the market dictates what I get paid’, the idea of an • efficiently functioning economic market in executives and • how they perform is disputed. • agency: the economic principal (nominally, the owner of an • enterprise) engages an agent (the executive) to run the • organisation on the principal’s behalf. But there are • problems in specifying the details of the relationship. • stakeholder agency theory argues that a trusting • relationship is possible when parties learn to suspend • opportunistic economic behaviours over time. • tournament theory argues that a big prize is needed in • the form of CEO reward to keep the executive contestants • interested even when they have ‘won’.

4. Corporate governance regulatory context* • Cadbury Committee, 1992 • Greenbury Committee, 1995 • Hampel Committee, 1998 (reviewed Cadbury and Greenbury • implementation) • Turnbull Report, 1999 (Flint Report, 2004) • Myners Report, 2001 • Directors’ Remuneration Report Regulations, SI 1986 (2002) Higgs Report, 2003 (published simultaneously with the Smith • Report on audit committees) • Tyson Report, 2003 • DTI Report: Building Better Boards, 2004 • Combined Code on Corporate Governance, 2006 • * See CIPD ‘Non-executive directors’ resource on corporate governance’ at • http://www.cipd.co.uk/nedresource/information/corpgov.htm What does this imply for needed reward specialist skills?

5. Structuring and accounting for executive reward Example of a FTSE-100 company executive remuneration package and accounting statement

6. It’s not only about PLC executives … A ‘new management ethos’ is directed towards not-for-profit sectors.Private-sector-style boards as the primary internal corporate governance mechanism are replacing ‘collegial’ or peer-group forms of organisational governance.But attempts to apply agency-based reward systems is further complicated in the absence of an externally determined share price, determining changes in the public entity’s financial value. What performance measures and incentives may be offered to align executive incentives with the interests of owners (ie the state and, ultimately, citizens)? Source: Cahan, Chua and Nyamori (2005)

7. Summary • Executive reward – as with all employee reward bargaining – is contested both in practice (where comparisons are drawn) and in forms of theoretical explanation. • Rewarding directors and other executives has become a very complex activity, as well as demanding significant commitment of corporate resources (including non-executive input in remuneration committees and corporate reporting). • There are dangers in assuming a blanket approach to designing and judging executive rewards: while this may satisfy compliance, it may deliver contradictory messages and misunderstandings – comply or explain. • There is increasing pressure to demonstrate attention to all-employee reward levels and underlying principles when determining and accounting for executive rewards: see the article on executive pay by CIPD President Vicky Wright in People Management 4 September 2008, pp24–7 • ‘Joined-up’ approaches have been advocated as an antidote to the ‘economic agent’ orientation to executives: eg an article by Helen Murlis entitled Making executive coaching part of total reward published in IDS Executive Compensation Review. See the full reference online at: http://www.cipd.co.uk/search/results/bookrow.asp?ID=193064&Is .