Executive Compensation - what will the future will hold?

PwC has recently published its review of executive compensation for 2008 for the FTSE 250. In the current climate it makes interesting reading.

Performance and Reward

The economic downturn has resulted in increased tensions between companies and shareholders. Companies are concerned with the effectiveness of long term incentive plans in the current climate in relation to motivating and retaining executives. Therefore they have looked to adjust targets for executives more towards short term bonus. This gives cause for concern to shareholders in that there is a risk that rewards are becoming less aligned to performance. The review also cites retention bonuses as another worrying trend in this area. Retention bonuses are given to executives to retain their services after they have missed out on the top job. Clearly such a payment is not at all linked to performance and creates much ire amongst shareholders. Within the financial services sector the FSA has been tasked to intervene and develop a code of conduct for pay that adequately factors risk into bonus arrangements. All change in the City?

The Future

When deciding on the structure of future executive compensation remuneration committees will be addressing a number of issues:

• There will need to be closer links between reward and performance
• Shareholders will not tolerate increased bonus payments when profits and the share price is in freefall
• Retention of key executives will no longer form such a key part of remuneration discussions. Furthermore companies will need to take a rational view on the risk of losing key people in the current environment.
• Payment should be for results and not just for effort in a downturn

Within Financial Services, the FSA will ensure that the short-termism that contributed to the credit crunch will not be rewarded in the future. Central to this is the concept that “incentive payments should be based on performance measures that adequately account for the risk taken in producing profits”.

Indeed it is an interesting time for those who are responsible for setting executive compensation.

Rob Stephenson is a Managing Partner at Maven Partners, a specialist tax recruitment business.

robstephenson@mavenpartners.co.uk