Most FTSE100 CEOs are paid above their target bonuses: so is there an incentive to perform?
December 6, 2021
The High Pay Centre (HPC), earlier this month published a report on the pay-outs under Long-Term Incentive Plans (LTIPs) and bonuses for CEOs of FTSE 100 companies. The findings showed that those incentive plans often pay out a high proportion of their maximums, so the report argues that these plans are failing their key purpose of rewarding and incentivising executive performance.
HPC collected data for LTIPs, bonus policies, and actual payouts to FTSE 100 CEOs between 2009 and 2019, excluding instances where there was a change in CEO. In total HPC reviewed 746 LTIPs and 849 bonus plans.
Only 15% of LTIPs paid nothing, half of LTIPs paid out at least 66% of their maximum, and one-fifth paid 100% of their maximum. Bonus awards, albeit still arguably generous, are less extreme than that of LTIPs. Only 6% of bonuses paid out nothing, half of bonuses paid out at least 75% of their maximum, and 12% paid out 100% of their maximum.
In general, firms like those studied will set their ‘target’ awards to be 50% of the maximum; maximum award policies are – at least nominally – set to award exceptional performance. The results above seem to contradict what might be expected, as the mass of payouts are towards the higher end of the scale and not around the 50% mark. Likewise, the frequency of extreme results of 100% and 0% would neither be expected. The report makes the argument that if payouts behave like a guaranteed component of pay rather than an actual response to good CEO performance, then the remuneration policies at these firms are failing to provide a motivation for CEOs to perform and benefit the company. A similar point is also made in respect of the portion of firms which pay out 0%: the report suggests this may indicate that the remuneration policies again have failed to set goals that CEOs could have realistically attained.
It may reasonably be questioned whether so many truly merited awards as high as 100%, but it would be interesting to see how far the conclusions of the report may be borne when looking at the lower payouts. At first glance, these payouts are often a high proportion of the maximum, and while incentives ought to be challenging, they should of course be achievable. So perhaps these payouts are indeed merited as a response to CEO performance. Along the same reasoning, perhaps 0% or a low payout is not indicative of unrealistic targets, but the actual result of poor CEO performance. A clearer view of this may have been found by studying if these companies consistently offer the same awards from year to year: if many of these companies consistently pay out the same percentage then that would suggest that rewards are not fluctuating as the circumstances do. Furthermore, extraneous factors will often be at play, for example payment in shares can have a material effect on the amount received by an executive, particularly if the company’s share price increases sharply over the life of the incentive plan. These questions are not addressed by the HPC report.
MM&K is a leading consultancy with decades of combined experience in executive remuneration as well as the planning, design, and implementation of reward strategies for businesses of all sizes and sectors. For a rewards policy expertly suited to your organisation’s position and goals, please contact Paul Norris.