Leadership

'Negligible' link found between executive pay and performance

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The correlation between high executive pay and good performance is "negligible," a new academic study has found, providing reformers with fresh evidence that a shake-up of Britain's corporate remuneration systems is overdue.

Although big company bosses enjoyed pay rises of more than 80 per cent in a decade, performance as measured by economic returns on invested capital was less than 1 per cent over the period, the paper by Lancaster University Management School says.

"Our findings suggest a material disconnect between pay and fundamental value generation for, and returns to, capital providers," the authors of the report said.

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In a study of more than a decade of data on the pay and performance of Britain's 350 biggest listed companies, Weijia Li and Steven Young found that remuneration had increased 82 per cent in real terms over the 11 years to 2014.


Much of the increase was the result of performance-based pay. But, the report's authors say, the metrics used to assess performance — such as total shareholder return and earnings per share growth — are unsophisticated and short-termist, acting against the interests of long-term investors. The research found that the median economic return on invested capital, a preferable measure, was less than 1 per cent over the same period.

The evidence is likely to be closely scrutinised by the UK government. When Theresa May took over as prime minister in the summer, she vowed to push an agenda to curb excessive pay. Last month, the government published a green paper outlining proposed reforms.

Some had been watered down compared with Mrs May's original ideas, but more frequent binding shareholder votes on pay remain likely. There would also be an enforced publication of ratios comparing chief executive pay to that of average employees.

UK executive pay is the most generous in Europe. A separate research study, by Vlerick Business School's Executive Remuneration Centre earlier in December found that the median UK chief executive earned €6.175m last year, 50 per cent more than the average counterpart in Germany, the next best paying country.

Shareholders have been paying closer attention to executive pay this year, causing high-profile revolts by investors in companies such as BP, Shire and Anglo American.

The Lancaster study was commissioned by the CFA Society of the UK which represents chartered financial analysts. Will Goodhart, who heads CFA UK, said: "While there's been an enormous debate about pay and performance, the debate hasn't been sufficiently refined around the definition of performance."

The study found that the median pay package for a FTSE 350 chief executive was nearly £1.9m, compared with £1m in 2003. The highest paid sector, with a median of £2.9m, was healthcare. The average financial sector chief executive earned less than £1.7m.

This article was originally published on The Financial Times.