At least 50% of performance-related pay for executives should be linked to non-financial metrics, according to a recent report by the High Pay Centre, a progressive activist organization established in the wake of the recent financial crises that describes its purposes as to “monitor pay at the top of the income distribution and set out a road map towards better business and economic success.” The report, titled “Pay to Perform: What Do We Want Our Business Leaders to Achieve?” focuses on executive compensation for the FTSE 100 and argues that the current laser-like focus of shareholders and companies on short-term financial metrics will have long-term adverse effects on companies and the economy. The report’s conclusions reflect a growing movement in the UK to emphasize sustainability and alignment with customers and society as a whole rather than a focus on increasing shareholder value. To this end, the report calls on the UK government to redefine the fiduciary duty of large shareholders and company boards to take the broader interests of the social good into account.
Noting that increases in CEO pay over the past ten years have not reflected any significant improvement in FTSE 100 performance, the study calls for a minimum of 50% of performance-based pay to be tied to non-financial measures such as employee engagement, customer satisfaction, and social or environmental performance. The report also recommends mandatory reporting on social and environmental performance, including employee turnover, reflecting the increasing popularity of sustainability initiatives in the UK and Europe generally and that employee representatives should be elected to company boards, something the UK has appeared to reject in its recent push for governance and pay reform. The study concludes with the assertion that given the “changing nature of share-ownership,” attempts to reform corporate governance that rely solely upon shareholders as “agents of reform” are ineffective, and a new, government-driven focus on “long-term stewardship of a company” is what is needed to reshape the financial system.
