Companies move towards non-financial measures for executive pay
The amount of human capital information about employees, and information about other key stakeholders such as customers, that is gathered and analysed by our clients has increased significantly in recent years. But how effectively is this data being used to influence executive and employee behaviour? Ten years ago, the chair of a UK bank famously declared "there is no balanced scorecard", asserting the importance of shareholder returns and financial performance measures. Yet new survey research by PwC Monks shows that executive pay is increasingly reflecting the wider performance and stakeholder agenda.
The number of top UK companies offering annual bonus plans to executives based on purely financial measures has fallen by half over the past year (33% in 2005/6 to 17% in 2006/07). At the same time there has been dramatic growth in the number of such reward packages offered on a combination of financial, non-financial and individual measures (13% in 2005/06 to 31% in 2006/07)*. The trend is away from hard financial targets exclusively to include broader corporate activities such as levels of customer satisfaction, employee engagement and environmental measures.
The average maximum bonus opportunities available for chief executives in the FTSE 100 companies has risen to 123% of their salary from 103% last year, says the Annual and Long-term Incentives guide published this week by PricewaterhouseCoopers LLP Monks pay data services. At the same time chief executives in FTSE 250 companies have seen a smaller rise of 5% in the average maximum bonus opportunities to 100%, from 95% last year.
While incentive opportunities have increased, so have requirements to retain a minimum shareholding in the company, the aim of which is to maintain an alignment between management and shareholder interests.
Duncan Brown of PricewaterhouseCoopers LLP said:
"We are seeing a continuing shift towards variable pay in UK plcs and a growing emphasis on long-term performance when determining executive pay.
"Additionally, the broader corporate stakeholder and corporate responsibility agenda has stimulated growth in the use of non-financial measures in bonus plans alongside those more traditional measures focused on financial and shareholder return. Some of the most popular new measures are operational performance, customer and employee -related ones, which mean that if customer service levels fall then so could executive bonuses. What get's measured in organisations gets done, and so does what's bonused."