PAYnotes on linking bonuses to organisational performance

CC_Henry_Burrows_Winchester_High_Street_On_Torch_DayHot on the heels of my recent piece on transparency in executive reward comes a report from PwC on the degree of linkage between executive pay and organisational performance. In particular, this report looks at the strength of that linkage and how it has changed since the new regulatory framework came into force.

There is good news here. The simple headline is that more disclosure has strengthened the link between pay and performance. As far as measuring the effectiveness of the regulations is concerned, it looks like there are real grounds for optimism.

It’s worth defining terms here. First of all we’re talking about the FTSE 100. Secondly, when we talk about reward we’re specifically talking about bonuses. In other words, we’re not counting salary or long term incentives (LTIs). 

The fact that salary hasn’t been included in the analysis isn’t really a major concern as salary increases in the last five years tend to have been particularly restrained and, as I pointed out in the earlier article, they have generally been at least as modest as the increases given to employees more widely.

The exclusion of LTIs is understandable in the context of measuring the linkage to annual performance. Having said that, it is a very substantial component of senior packages these days. I hope that it demonstrates a similar correlation to performance, albeit on a longer time scale than annual performance.

It’s also worth flagging that PwC found that the degree of disclosure about bonus arrangements was quite varied. Slightly more than a third of the FTSE 100 have full disclosure as prompted by the regulations whereas the remainder had partial disclosure or, in the case of 28 per cent, no disclosure on commercial sensitivity grounds. 

More positively, the other good news is that the correlation between performance and bonus is getting better year on year. The PwC analysis shows that the correlation has risen in each year since 2012.

This is encouraging. The financial crisis was littered with examples of excessive bonuses being paid despite mediocre or even poor performance. By shining a light on what needs to be done to earn a bonus, the regulations seem to be doing what they were designed to do. They also provide shareholders with the ammunition they need to judge whether or not executive bonuses are justified.

Finally, kudos to PwC for the title of their report. It really encapsulates what their analysis shows - “Sunlight is the best disinfectant”. Good work guys. You deserve a bonus.

By Peter Brown