Pay and performance: creating a fairer share of rewards


business and industry, employment, fairness, personal finances

Author(s):  Kayte Lawton
Published date:  09 Jan 2012
Source:  IPPR

Reining in executive pay has become a touchstone issue for politicians of all parties. The Coalition partners are both fighting to ensure it is their party that is identified with ending spiralling top pay, while the opposition repeatedly returns to the topic of boardroom pay deals. The combination of soaring executive pay and stagnant average wages is generating widespread public outrage that politicians are keen to capitalise on.

The problem of executive pay is exemplified in new IPPR analysis showing the weak relationship between CEO remuneration and company performance among the FTSE 100 list of the UK’s top companies. The analysis looks at 87 companies for which comparable data was available over 2010/11, and assesses year-on-year changes in CEO remuneration and company value in the most recent accounting period.

The table below shows the results for the main industry sectors covered by the FTSE. They suggest little relationship between CEO remuneration and increase in market capitalisation, as one measure of company performance. Sectors experiencing similar improvements in company value saw very different increases in CEO remuneration. For example, company value increased by 19 per cent in both the banking and support services sectors, yet CEO remuneration in banking rose by 81 per cent, while the rise in support services was below average at 16 per cent. The computing sector saw the largest increase in company value, but a relatively small increase in average CEO remuneration.


Average total CEO remuneration, 2010

Average year-on-year change in CEO remuneration, 2010

Average year-on-year change in company value, 2010

Aerospace and defence








Computing and technology




Financial services




Food and beverage production




Industry and engineering
















Oil and gas production




Pharmaceutical and healthcare




Real estate




Retail and personal goods




Support services












Travel and leisure












Source: data collected by One Society from company reports; market capitalisation record from the London Stock Exchange

The chart below plots the relationship between the change in CEO remuneration and the change in company value in the 87 companies we analysed. It suggests that only a very weak statistical relationship exists between these two factors.

Change in company value vs change in CEO pay

These findings help to cut across the argument that company directors must be paid large and increasing amounts in order to secure the strong performance of their companies. While company value is just one measure of company performance, other studies have found a similarly weak relationship between other measures of performance and top pay.

Previous measures

Evidence of the weak relationship between executive pay and performance has previously led to policy responses that seek to strengthen that relationship. This has been one of the central goals in the development of corporate governance and performance-related pay in the UK over the last 20 years. Yet these reforms have taken place alongside rocketing top pay deals.

Performance-related pay has led to a shift in the make-up of pay towards more variable and complex forms of remuneration, such as annual bonuses, deferred shares and long-term incentives like performance share plans. This increasing complexity makes it harder for shareholders to ensure that remuneration is linked to performance, and more likely that at least one element of a remuneration package will pay out. The shift to variable pay has also led executives to demand increases in the total value of incentive-related payments to offset the risk that one or more element does not pay out in full. This has driven large increases in total executive remuneration over the last 20 years, out of all proportion with even the greatest improvements in any measure of company performance.

Where are the shareholders?

Governments seeking to tackle excessive boardroom pay have repeatedly returned to the well-worn tools of UK-style corporate governance: greater transparency and disclosure, improving the accountability of managers to shareholders, strengthening the role of non-executive directors, and a largely voluntary system of policing corporate governance. While each has an important role, these tools have proved themselves to be ineffective in reining in top pay over the last 20 years.

This suggests that ‘shareholder activism’ alone – encouraging shareholders to vote against remuneration reports or engage with pay and performance issues in other ways – will not work now either. Shareholder activism relies on institutional shareholders, like pension funds and insurance companies, but they only own around a quarter of UK shares. Over 40 per cent of UK shares are held by foreign owners. Even UK institutional investors are increasingly holding shares over shorter periods of time, making it hard for them to have oversight of the long-term interests of companies. Most institutional shareholdings are managed by fund managers, who tend to have large remuneration packages themselves, suggesting they are not best placed to tackle excessive pay. The diminished ability of shareholders to tackle excessive boardroom pay is demonstrated by the fact that only 5.6 per cent of remuneration reports in FTSE companies were voted against by shareholders in 2010.

Efforts to tackle top pay also say very little about how pay and reward could be improved for the majority of workers. IPPR research has found that many people are unhappy about the focus of rewards on a handful of top earners and the inability of most employees to share in the success of companies. Such models of reward fail to reflect the shared contribution of staff, and the role that employees have in promoting the long-term health of their companies. Polling data from the CIPD shows that a majority of employees feel proud to work for their organisation, but many fewer feel valued in the workplace. These concerns are made more important by the spectre of stagnating living standards, flat real wages and shrinking resources for redistribution to support low and middle earners.

Next step: empowering employees

The combination of public anger over top pay and the need for a fairer share of rewards to go to employees argues for a broader debate about pay and reward across organisations, one that does not focus purely on high pay or simply resort to strengthening the hand of shareholders and non-executive directors. Key to this will be a broader conception of corporate governance that recognises the legitimate role of groups beyond shareholders in influencing how companies are run. Employees have a vital role to play, because they tend to have a strong interest in the long-term performance of companies and a keen understanding of their day-to-day operation.

Measures such as requiring listed companies to include employee representatives on remuneration committees should be supported. Crucially, this would ensure that pay and conditions throughout a listed company are taken into account when boardroom pay is set – already a requirement of the UK Corporate Governance Code but rarely enforced under the current configuration of remuneration committees. Recognising the role of employees could go further by requiring boards to annually report to staff on pay and reward arrangements across companies, and making it easier for employees to take a financial stake in their company.


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Kayte Lawton, Senior Research Fellow