OUTLOOK :The crinkley top of business stardom
Wednesday 25 January 1995
The Institute of Directors wants top performers in business to be rewarded like sports stars and entertainers, which is a perfectly reasonable position to take. The trouble is the transfer market in executives in many industries is highly illiquid - theyare not available very often - and there is no business equivalent yet of audience measurement.
So we end up with abuses that bring into disrepute the excellent idea of a business star system - one that should routinely make men like Sir Paul Girolami into multi-millionaires for achievements like growing Glaxo into a world-beater.
Cedric Brown's salary at British Gas, which has set back the cause of the business star system many years, was clearly a stab in the dark by a remuneration committee as muddled and confused as the rest of us about what he is worth.
Indeed, just about every evaluation technique for directors' salaries is flawed. Inter-firm comparisons lead to pay policies based on above average remuneration, which of course continually raises the average. They make sense only where executives are genuinely mobile and being courted for jobs. Most are not.
Awarding generous share options ties rewards to those of the shareholders, but also brings an undeserved bonanza in a bull market. Options make sense only as a relatively small part of a total remuneration package, or when their award is based in the first place on genuine performance measurement, which is rare.
As with bonuses - on balance more useful than options - the key lies in agreeing those performance criteria, and especially in making sure they are based on improvements in shareholder value, itself a concept whose detailed definition is a minefield.
If pay consultants used a fraction of the time they now spend on comparative surveys of executive earnings developing workable measurement systems for executive performance, they might get out of this mess they are now confined to.
In the meantime, poor old Mr Brown is left defending his pay rise as "only" 28 per cent. To boot, it seems he may even have broken the spirit of the Institute of Directors' new guidelines. These sensibly emphasise the importance of relating pay to performance. The changes at British Gas consolidated Mr Brown's performance related bonus in a largely flat rate pay package.
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