EXECUTIVE PAY TRENDS IN THE FTSE 100

In the UK, over half of FTSE 100 companies now use non-financial measures in bonus programmes, up from one-third in the previous year. This article examines some of the way in which FTSE 100 companies are moving in the awards of executive pay and this has produced some interesting results.

In the shareholder-obsessed 1990s, the chairman of a leading City financial institution declared that ‘there is no balanced scorecard’ – the implication being that only shareholder value matters. Today, however, the customer and the community are king. The UK Government Department for Trade and Industry recently made a statement that: ‘business operates today in a new market place… stakeholders demand that business functions in a responsible way.’ It defines a responsible employer as one that takes account of the economic, environmental and social effects of its activities.

In response, some companies are putting corporate social responsibility (CSR) at the heart of their business strategies, and producing voluminous annual CSR reports to convince us of their green credentials. Recent reforms to the Companies Act have also established a statutory duty for UK directors to take account of the interests of all their stakeholders, including employees and customers, in making their decisions.

A similar conclusion arises from a more hard-headed analysis of self-interest. Factors such as employee engagement and customer satisfaction are proven leading indicators of future financial success. No organisation acting rationally in the interests of its shareholders can afford to ignore these.

So, from a variety of motivations, companies are increasingly looking beyond the purely financial measures of their performance. Kaplan and Norton’s famous research demonstrated that an excessive focus on budgets would hamper the delivery of strategy in a majority of organisations. Estimates now show that two-thirds of organisations have adopted some variant of their balanced scorecard.

It is interesting to note that the measurement of performance in the FTSE 100 companies are becoming more and more linked to Customer, rather than Shareholder, satisfaction and that this is being reflected in Executive pay awards. Those Executives who are achieving the most successful results in pleasing their customers are also receiving the largest relative rises in pay and bonuses.

Even for other groups of staff, the UK is also witnessing a similar trend towards multiple measures across a broader set of performance criteria. These include, for example: the replacement of individual sales commission systems with bonuses which, as well as sales, commonly reward customer satisfaction and team performance; in call centres, measures of customer satisfaction being employed alongside more traditional sales and productivity targets; and factory productivity schemes also introducing a wider range of measures, for example safety, productivity and quality plans.