Company bosses have no real incentive to invest in improving their employees’ situations, with executive pay largely based on the profits they make for shareholders, the CIPD and High Pay Centre have warned.
A new report by the two organisations into CEO pay and the workforce, released today, reveals that for every £1 a FTSE 100 chief executive could earn for meeting an employee-related target, they could receive £41 for hitting a financial target.
The analysis of boardroom-level performance-related pay plans of FTSE 100 firms found that although many companies talk about the importance of environmental, social and corporate governance (ESG) measures, such metrics are conspicuous by their absence when it comes to performance-related pay.
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Just one in three businesses (34 per cent) used employee-related metrics – which can cover areas such as health and safety and engagement and diversity – in their chief executive performance-related pay package, said the report. And among these firms, meeting these employee-related metrics accounts for just 5.9 per cent of performance-related pay on average.
In contrast, financial metrics were universally used in performance-related pay, the report said.
The report also showed the average weighting for employee-related metrics was 3.3 per cent of bonuses and just 0.8 per cent long-term incentive plans.
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Employee-related metrics “account for a tiny proportion of maximum incentive pay” and “the incentive to act in the interests of employees is so small in comparison with the incentive to pursue financial returns that it is essentially no incentive”, it said.
Luke Hildyard, director of the High Pay Centre, said the report showed CEOs were “overwhelmingly incentivised to put financial returns first” in a corporate culture that “prioritises investors over workers and wider society”.
The UK Corporate Governance Code states that boards must consider people issues such as organisational culture, diversity, wellbeing and reward of the wider workforce when considering executive pay.
Charles Cotton, senior performance and reward adviser at the CIPD, said: "People professionals have a crucial role in helping the RemCo in its conversations with stakeholders about which employee measures are the most appropriate to assess corporate and CEO performance.
“In addition, to provide the RemCo with the right workforce data, in the right format, at the right time, they will also have to ensure that they have the appropriate data skills and systems in place."
And Maria Jose Subiela, global goals director at Business in the Community, said this year had taught businesses that “the strength of a company doesn’t just come from its bottom line”. “If our economy is to recover, it’s about time that truth was reflected in our definition of value – both for executives and investors,” she said.
Remuneration committees should have a broader remit, with a “wider focus on issues such as organisational culture, diversity, wellbeing and the rewards of the wider workforce” when it comes to setting pay, Subiela said.
The report recommended that RemCos “evolve into people and culture committees” and called for boards to include non-executive directors with HR backgrounds, as well as employee representatives.
Frances O’Grady, general secretary of the TUC, said: “Incentive pay for directors should be replaced by profit share schemes in which the whole workforce can participate. And remuneration committees should include at least two workforce representatives.”
And George S Dallas, policy director at the International Corporate Governance Network (ICGN), said: “Sustainable financial success requires not only attention to profitability, but also strong and durable stakeholder relations.
“Even if the pace is slow, some companies are beginning to incorporate ESG metrics into their pay structures, and the ICGN encourages more companies to link material ESG metrics into long-term performance plans.”