Performance vs. Pay: Should boardroom officials be rewarded regardless of their company’s success?

A recent report conducted by a leading pay research company, has emphasised the increasing pay-packet of FTSE 100 directors. Alex Blackburne asks whether or not company performance should be considered in their pay.

According to research conducted by Incomes Data Services (IDS), directors in FTSE 100 companies have received on average, a 49% increase in total pay.

This combines their annual salaries, bonuses and share-based awards, with the overall average income around £2.7 million per annum.

Deborah Hargreaves, chair of the High Pay Commission (HPC), claims that there seems to be, “Very little link between executive pay and company performance”, with many directors’ wages going up, despite their company not receiving increased revenue.

“It is very hard to justify a 49% pay rise for chief executives when company share prices have gone nowhere, profits are down and they are laying off staff”, Hargreaves said.

“Average wages have gone up by only 2.6% last year which means they are not even keeping up with price rises.”

Meanwhile, Steve Tatton, editor of the IDS report, questioned the ethics behind the seemingly extravagant pay-packets for directors.

“At a time when employees are experiencing real wage cuts and risk losing their livelihoods, without further explanation it may be difficult for FTSE 100 companies to justify the significant increase in earnings awarded to their directors.”

According to Tatton, though, “The pay gap between the boardroom and the shop floor does not yet show any signs of closing”, with more pay increases for high-ranking officials expected to continue in the foreseeable future.

Another report, this time put together by the HPC in September and titled ‘What are we paying for?’, also makes for disturbing reading.

HPC’s research suggests that between 2000 and 2010, the average earnings of all FTSE 350 directors increased by 108%. However, the average market capitalisation increased by just 8%, leading to questions about the justifiability of the drastic pay increases.

The performance vs. pay argument is likely to continue, but in reality, there is only one outcome if things stay the same – an endless stream of senior executives rewarded despite failure, while their shareholders and workers gain little or no reward for their contribution.

If you would prefer to invest in funds that back companies where pay is related to performance, ask your financial adviser if you have one, or complete our form and we’ll connect you with a specialist ethical adviser.