+1 212 318 2000
Europe, Middle East, & Africa
+44 20 7330 7500
+65 6212 1000
Sarah Jane Leake | Bloomberg Law What are we paying for? Exploring executive pay and performance – High Pay Commission Discussion Paper, 5 September 2011 The concept "pay for performance" has dominated corporate governance culture over recent years. However, while corporate governance reforms have tried to align directors' and shareholders' interests by linking pay to performance, the UK's High Pay Commission's (HPC) latest report1 reveals that there is in reality little link between a director's incentives and the way in which a company performs. Statistics show that, over the last decade, the average annual bonus for a FTSE 350 director increased by 197 percent while the average year-end share price fell by 71 percent. Is the link between pay and performance therefore merely illusory?
Corporate Governance ReformsSome 20 years ago, Sir Adrian Cadbury was asked to develop the first corporate governance framework for the UK. The report2 was published in 1992, and the principles articulated therein have guided corporate governance developments ever since. One of his recommendations, which has had lasting effect, stated that boards "should appoint remuneration committees . . . to recommend to the board the remuneration of the executive directors in all its forms, drawing on outside advice as necessary."3 While it was thought that this would help curb executive excess, such expectations were premature. Concerns over "fat cat" salaries resurfaced during the mid-1990s, sparked by some big pay rises for the executives of the country's recently privatised utilities companies. To help calm the public storm, Sir Richard Greenbury was commissioned to further develop a corporate code of best practice.4 Accepting and building on the principles set out in the Cadbury Code, the Greenbury Code emphasised two further themes that ended up shaping the future of executive remuneration – pay for performance, and the alignment of shareholder and director interests. The Greenbury Code, however, failed to restrain pay at the top and dampen public disquiet. Further committees were subsequently set up by the Government in order to tackle the problem. As a last resort, in 2005, the Government amended the company law legislative framework, to put remuneration disclosure requirements on a statutory footing.5 Amongst other things, quoted companies were required to publish a directors' remuneration report as part of their annual reporting cycle.
The Financial Sector"Nowhere," comments the HPC, "is there a clearer example of corporate failure than in finance."6 In 2010, the average total earnings of executive directors in state-supported banks amounted to just under
All Bloomberg BNA treatises are available on standing order, which ensures you will always receive the most current edition of the book or supplement of the title you have ordered from Bloomberg BNA’s book division. As soon as a new supplement or edition is published (usually annually) for a title you’ve previously purchased and requested to be placed on standing order, we’ll ship it to you to review for 30 days without any obligation. During this period, you can either (a) honor the invoice and receive a 5% discount (in addition to any other discounts you may qualify for) off the then-current price of the update, plus shipping and handling or (b) return the book(s), in which case, your invoice will be cancelled upon receipt of the book(s). Call us for a prepaid UPS label for your return. It’s as simple and easy as that. Most importantly, standing orders mean you will never have to worry about the timeliness of the information you’re relying on. And, you may discontinue standing orders at any time by contacting us at 1.800.960.1220 or by sending an email to firstname.lastname@example.org.
Put me on standing order at a 5% discount off list price of all future updates, in addition to any other discounts I may quality for. (Returnable within 30 days.)
Notify me when updates are available (No standing order will be created).