Boardroom excess? British companies stick with bonus plans despite criticism

LONDON (Reuters) - Pressure on British companies to ditch a common performance-related bonus scheme blamed for generating excessive executive pay has not stopped many firms from planning to stick with such schemes for another three years, a Reuters analysis shows.

FILE PHOTO: A general view of the financial district of London is seen in London, Britain, October 19, 2016. REUTERS/Hannah McKay/File Photo

In theory so-called long-term incentive plans (LTIPs) aim to legitimately encourage management success in boosting shareholder returns. Yet a series of corporate scandals and lucrative payouts has made them a target for criticism.

Lawmakers in Britain last week recommended LTIPs be phased out from 2018, while Norway’s sovereign wealth fund, the world’s biggest, wants them scrapped. The British government has also launched a review of corporate governance including incentive plans.

Exemplifying LTIP generosity, advertising company WPP WPP.L paid Chief Executive Martin Sorrell more than 70 million pounds ($88 million) for 2015, more than 60 million of which came through an incentive scheme - a payout that a third of WPP shareholders declined to support.

However, most top companies have retained LTIPs as part of executive pay when seeking investor approval for a three-yearly remuneration policy at shareholder meetings.

Analysis by Reuters of company annual reports and data from governance advisory firm Manifest shows 59 members of the FTSE 100 .FTSE blue-chip stock index recently updated their remuneration policy or plan to soon, of which 56 currently use or plan to continue using LTIPs.

“There (is) no reason why LTIPs should be used almost universally across the FTSE 100,” Luke Hildyard, policy lead for stewardship and governance at trade body the Pensions and Lifetime Savings Association, said.

“We would welcome more companies moving to simpler, smaller pay packages, perhaps involving a basic salary and a long-term share award,” Hildyard said, adding the current system acted to drive ever-higher pay awards.

Companies use a range of data to calculate the payouts, with many referencing the firm’s share price.

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The process, opponents say, can be complex, overly generous, and can potentially incentivise actions detrimental to the long-term interests of a company. There is also evidence their overall economic benefits are limited.

A study by Lancaster University Management School, looking at Britain’s 350 biggest listed companies, found CEO pay had risen an average 82 percent in real terms between 2003 and 2014/15, but economic return on invested capital was up less than 1 percent.


Asset management industry body the Investment Association said too much time is spent discussing pay with companies, and a simpler structure would free up time to engage on other important issues.

As the government considers whether to implement the recommendations by parliament’s Business, Energy and Industrial Strategy (BEIS) committee, some cautioned a blanket ban was equally problematic.

“We don’t think there should be a one-size-fits-all approach ... companies should be able to choose the right tools for the job,” said Sarah Wilson, chief executive at Manifest, which advises funds on how to vote on corporate decisions.

The head of governance at a leading British asset manager said most LTIPs worked well. “In the vast majority of cases, we’ll vote in favor of them because we’ve analyzed them in detail and think they’re based on stretching targets that reflect the company’s strategy ... there are exceptions, but you deal with them on a case-by-case basis.”

Ashley Hamilton Claxton, corporate governance manager at Royal London Asset Management, said she was willing to consider alternative bonus models but a phasing out of LTIPs from 2018 would be challenging.

Were the government to rule out LTIPs, Manifest’s Wilson said many firms would likely use share options, with bonuses paid in shares with a long-term lock-in period.

“Much of it will depend on the tax implications,” Wilson said. “Some investors like LTIPs because there are performance conditions associated with them so the BEIS committee’s view isn’t necessarily universally approved.”

Yet the key basis of LTIPs remains contentious.

“The idea of tying a CEO’s pay to the share price is flawed,” said Stefan Stern, director of the High Pay Center pressure group. “Share prices move for all sorts of reasons completely beyond the control of one human being or the board.”

($1 = 0.7973 pounds)

Editing by David Holmes