Ethics organisation calls for executive pay reform

The current system of executive remuneration is “broken, unnecessarily complicated, and in need of radical overhaul,” according to the Institute of Business Ethics (IBE), which is calling for broad reform to simplify reward packages and incentivise executives to take a long-term view.

“We are suggesting a simpler system in which executives are paid in cash and obliged to use some of their salary to buy shares in their company, which are then held for the longer term,” IBE Director Philippa Foster Back said in a statement.

Dividends from the shares would reduce the need for bonuses or other devices such as options and share schemes, which are poorly understood, the statement continued.

“Obliging executives to buy and hold shares for the long term would incentivise them to run the company in a sustainable way, make them more aware of its impact on society and the need to nurture its licence to operate,” Back said.

The IBE also proposes that chief executives should not be eligible for bonuses or pay increases when their company has a pensions deficit and no agreement has been reached with a pensions regulator as to how to resolve it.

The recommendations were made as part of the IBE’s submission to a UK Parliamentary inquiry into corporate governance. The IBE also suggested that directors be required to publish annual statements detailing how the needs of stakeholders, such as customers, suppliers, and employees, had been considered in their priority-setting, decision-making, and skills-development initiatives.

The need for rewards packages to be revamped was highlighted in a recent study by the Chartered Institute of Management Accountants (CIMA), which gathered the views of 4,106 members around the UK.

Forty-four per cent of respondents agreed that high bonuses for executives can cause resentment amongst others. Similarly, 45% think that bonuses awarded to top earners in their organisation are not fully deserved.

The findings “suggest that perceptions of ‘unjustified’ bonuses, whether stemming from ineffective incentive designs or not, can trigger resentment and undermine employee engagement and motivation. This hurts performance, exacerbates myopia, and corrodes culture,” said Professor Wim Van der Stede, CIMA Professor of Accounting & Financial Management at the London School of Economics.

In the CIMA survey, 43% of UK respondents agreed with this statement: “Bonuses are an excellent way to motivate staff and guarantee long-term business success.” However, in practice just 4% of the organisations represented in the poll based bonuses on long-term organisational performance. Thirty-six percent said bonuses were based on short-term financial results, and 43% a combination of the two.

Asked how they would improve the current system, respondents were keen to see greater transparency and fairness in the bonus-setting process. They also expressed a preference for basing bonuses on individual performance, rather than overall company performance. Finding a better mix of short-term and long-term indicators was the third most popular improvement.

—Samantha White (swhite@aicpa.org) is a CGMA Magazine senior editor.