IoD fears Greenbury code is bidding up directors' pay

The performance criteria used to implement the Greenbury code appear to have led to a bidding up of directors' pay and need revising, the Institute of Directors has told a new committee on corporate governance.

The methods used to calculate bonuses, share options and long-term incentive plans have failed to meet the Greenbury requirement that they are "relevant, stretching and designed to enhance the business".

Boards have not applied the criteria "appropriately," and the use of comparisons with other companies does not appear to be working, the directors say in evidence to the committee, which is chaired by Sir Ronald Hampel.

The IoD adds that many experts believe this is leading to the bidding up of remuneration. There is too much focus on growth in earnings per share, rather than the original idea of using total shareholder return to measure performance.

The IoD, whose director-general, Tim Melville-Ross, was a member of the Greenbury committee, says in evidence to be published next week: "Now is the opportunity to revisit the whole area of performance criteria. Remuneration committees need to beef up performance criteria and focus more on the successful achievement of long-term company objectives."

The directors' organisation says it is "undoubtedly true that many directors of larger listed companies have seen increases in their remuneration easily outstrip those of lower to middle management, directors of small and medium enterprises and employees at large".

The IoD is not alone in its criticisms of the way performance is measured. The National Association of Pension Funds has made a similar attack, and the Association of British Insurers has made the point in its own evidence to the committee, which has asked for written evidence by 31 December.

The IoD also says that some companies are presenting the detail of directors' pay in their reports in a way which masks the original purpose of disclosure: "The sheer quantity of information published in annual reports and accounts is beginning to confuse and irritate shareholders."

It often complies with the letter rather than the spirit of the code, which adds to confusion and "feeds the media hype that has grown up around pay". The IoD recommends an abbreviated report on pay that sticks to "relevant" information. It also attacks what it calls "goldplating" of the Greenbury code as well as the wider Cadbury code on corporate governance by accountants and actuaries, who have added a large amount of detail which encourages companies to stick to the letter rather than the spirit.

The IoD believes many of the rules are too prescriptive and it urges the Hampel Committee to correct this tendency, so that companies can reject items in the codes as long as they explain why.

The IoD says all directors should put themselves up for re-election every three years. It recommends dropping the Greenbury rule recommending maximum rolling contract periods of one year.