Spotlight on the relationship between pay and performance

There is not a strong link between high CEO pay and company performance, according to Colin McLean, the managing director of SVM Asset Management.

McLean said that 2017 could be a year of change on executive pay, with investors and politicians willing to oppose undeserved and excessive remuneration deals. McLean commented: “Some long-term incentives were put in place before the 2012 reforms, with binding shareholder votes only required every three years. This year almost half the FTSE 100 face binding votes on pay, and we will see changes bite. The shareholder revolt seems less likely to fizzle out this time.”

McLean added that executive pay in the UK has trebled in the last 17 years, while the FTSE 100 index has not changed much. Average CEO pay at the UK’s top 100 companies is now 150 times more than average worker income and the ratio has doubled in the last decade. “UK CEOs are the most highly remunerated in Europe, earning 50% more than the average counterpart in Germany, the next best paying country” he commented.

According to a recent study from Lancaster University Management School, there is, in fact, a negative correlation between high CEO pay and performance; it found a material disconnect between pay and fundamental value generation. McLean commented: “Poorly thought out rewards can encourage self-serving behaviour and destroy corporate value. Most incentive schemes remain relatively short-term, with poor linkage to shareholders’ long-term interests or sustainable returns.” He added that investors have a vital role to play here in a low returns environment: “As lower market liquidity encourages longer holding periods, institutional investors must act to make boards effective, rather than simply voting with their feet. Incentives for CEOs should simply not be an option on a rising stock market.”