Performance-related pay – the importance of selecting the right metric

A study by Manifest and MM&K1 has shown that CEOs’ pay increased by 10 per cent over the past year. The UK’s 100 highest earning CEOs were paid £425 million in 2012. The research says this is £45 million more than 2011. The report says the increased payments were mainly due to Long Term Incentive Plan (LTIP) payouts. This is linked to share price movements.

There was an interview on Radio 4’s Today2 programme with the chief executive of Manifest, Sarah Wilson. She argued that CEOs are benefiting from factors beyond their control when share prices go up, i.e. they are benefiting from things for which they are not responsible. She said each company should be looked at individually. We need to find factors that are sensitive to the performance of people. For example, it might be better to reward CEOs based on customer service than share value.

You might think that hospital mortality and share value have nothing to do with each other but they are similar in one respect – neither measure is under the control of management. As a company’s share price fluctuation turns more on factors such as qualitative easing and the economy, so a hospital’s overall mortality rate can be little influenced by management. This is because most deaths are inevitable and only a small proportion can be prevented. Hospitals should not be rewarded (or sanctioned) for things that are not under their control. To do so produces perverse incentives and so too does use of the wrong metric to reward senior managers.

References

1. Manifest and MM&K. Total Remuneration Survey 2013.

2. BBC. Shareholders are now ‘much more sophisticated’. http://www.bbc.co.uk/news/business-22841285 (accessed 10 June 2013).

Advertisements

Leave a Reply

Fill in your details below or click an icon to log in:

WordPress.com Logo

You are commenting using your WordPress.com account. Log Out / Change )

Twitter picture

You are commenting using your Twitter account. Log Out / Change )

Facebook photo

You are commenting using your Facebook account. Log Out / Change )

Google+ photo

You are commenting using your Google+ account. Log Out / Change )

Connecting to %s