Drop long-term pay plans, think-tank argues

Long-term incentive plans (LTips) for executives should be scrapped and performance bonuses should be paid in cash not shares, according to a new report from the High Pay Centre.

The recomendations are at odds with conventional wisdom on executive pay, which typically favours long-term bonuses and payments made in shares so as to align the interests of executives with those of long-standing shareholders.

The think-tank's report argues that targets based on company profits or earnings can create perverse incentives for executives to pursue these goals even if this course runs against the longer-term interests of the group.

It also argues against another aspect of pay policy that is in vogue - deferring payments in order to achieve a longer-term approach. Instead, it says, deferral simply drives up the value of pay packages, as executives are compensated for the delay in receiving payments

Since the 1990s, the report says, performance pay has been behind sharp rises in what executives take home, without there being a corresponding improvement in corporate performance. Between 2000 and 2013 bonus payments increased at roughly twice the rate of earnings per share and company profits.

There is little sign that institutional investors are unhappy with the way LTips work.

In the past couple of weeks, a number of FTSE100 companies have had their pay reports approved with next to no opposition even in cases where some proxy advisers warned that the schemes paid out very generously and that the performance conditions were not properly disclosed.

The exception was BG Group, where nearly 18 per cent of the shareholder base voted against the remuneration report, and 13.5 per cent opposed the re-election to the board of Sir John Hood, who chairs the remuneration committee.

In that instance, investors were also expressing anger at the "golden hello" that BG had offered Statoil boss Helge Lund to become chief executive, and the amount he stands to gain after just eight weeks as the boss when the energy group is taken over by Royal Dutch Shell.

"Too often what ought to be good news stories about organisations employing thousands of people and generating healthy profits, are undermined by provocative and disproportionate pay packages to just one or two individuals at the top," said Deborah Hargreaves, founding director of the High Pay Centre.

The report also recommends using a broader range of company-specific targets such as productivity when setting performance pay; making remuneration committees more diverse, and issuing "golden hellos" only when a post has been advertised.

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