Letter: Executive perks
Sir: If share options are a virility symbol ('Boardroom hunt for new executive virility symbol', 16 February), then companies that offer them willy-nilly are likely to get directors who focus on virility-oriented goals (eg, empire building and other objectives unrelated to shareholders' interests).
The root of the issue is the mantra of 'aligning executive and shareholder interests'. Having recited it, there is often sloppy, if any, analysis of how to accomplish this. Saying it will not make it happen.
What has to be done is to recognise that executives have to act like shareholders, ie, take a risk. Executives should be risking their own money as shareholders risk theirs. This means a greater proportion of variable, performance-related remuneration (whether it is cash or stock-related instruments). Risking the shareholders' money without risking their own leads executives to make decisions of highly variable quality.
PA's survey of remuneration practices and performance of the top UK companies amply illustrates the point. Companies with a high variable/low fixed remuneration achieved returns on equity of 22 per cent, whereas the low variable/high fixed companies yielded just 4 per cent.
As returns on equity are the basic driver of shareholder value, shareholder activists should insist on executive remuneration contracts that promote their interests (rather than provide perks unrelated to performance). They should not listen to the siren voices that talk about 'the market'; 'the market' is the excuse of those who envy, not those who have the talent to perform.
Yours faithfully,
JULIAN BURNETT
PA Consulting Group
London, SW1
Join our commenting forum
Join thought-provoking conversations, follow other Independent readers and see their replies