Should we measure board pay by input or output?
Company directors are working overtime to cope with the recession: should we thus expect them to take a pay cut? It is a question remuneration committees must ask.
Performance-based pay has been the model for the past decade and when profits are rising, that means a guaranteed annual pay rise. Now that sales, nevermind, profits and share prices, have gone into reverse, boards are questioning whether they should be paid for their input rather than their results.
The housebuilder Bellway has discovered what happens when it increases pay while trading is deteriorating. Having missed its performance targets it chose to pay £630,000 in bonuses anyway to three executives. Shareholders voted against approving the remuneration report (though as the bonuses have already been paid, that merely means the company will promise not to do it again and warn other companies not to do it at all).
But the greater losers in this conundrum of working harder when times are tough are not executive directors but the non-executives.
Think of the non-execs at Britain’s banks who have attended far more meetings in the past year and read far more reports than they ever expected when the accepted the role. But this is no time for increasing their pay.
For those directors who sat through the board meetings that made the disastrous investments that got the banks into trouble, this additional work can be seen as fair punishment, but for the new non-execs brought in to clean up the mess, this is poorly paid work. Yet if the rate for the job is not increased to reflect the additional burden – nevermind reputational risk – boards of troubled companies will be unable to recruit essential new talent.
We must accept that the performance-based pay model, never perfect, will not work in a recession, even if targets are changed to measures such as debt cover or gearing. The downturn might remove the boardroom excesses but it will not encourage companies to recruit directors who can retrench or cope with shrinking markets. In particular, it will not bring forward the non-execs needed to keep the executives in order.
