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Performance-related pay is a myth to excuse greed

UNEQUAL PAYIt has been reported today that Bob Dudley, chief executive of BP, received a 25% rise in total pay and bonuses last year even though shareholder returns deteriorated and company profits fell back significantly because of the halving of the world price of crude. According to BP’s annual report published yesterday, his overall pay rose from £6.6 millions to £8.25 millions. The report said “Bob Dudley’s remuneration is closely linked to performance(!). The pay he received in 2014 reflects BP’s delivery of strategic targets over the past 3 years”. This is nonsense. BP doesn’t say which strategic targets they had in mind, whether they were picked at the outset or selected now to give the best retrospective impression, how exactly they were measured, etc.

The shenanigans surrounding performance-related pay have been devastatingly exposed by the High Pay Centre. The have found that since top pay took off from the Thatcher era in the 1980s, it is now normal for as little as a fifth of a top director’s earnings come in the form of a salary while four-fifths is made up of a range of ‘incentive’ awards. But their research has discovered that there is either no relationship at all or at best an extremely weak relationship between directors’ pay and performance.

They have showed that the statistical correlations between on the one hand either pre-tax profit or earnings per share and on the other hand the subsequent bonus payments handed out were insignificant. Specifically, 98.7% of the change in annual bonuses could not be explained by changes in pre-tax profit, and 99% of the change in annual bonuses could not be explained by changes in earnings per share. Furthermore there was no noticeable correlation between long-term incentive plan (LTIP) share awards and either changes in total shareholder return over 3 years or changes in earnings per share over 3 years. Altogether that amounts to a conclusive refutation of any idea that performance-related pay has any evidential foundations whatsoever.

Yet another way of putting pay-for-performance to the test is to compare the increase in directors’ pay over a lengthy period of time with indices of their firms’ performance over the same period. On that basis the total earnings for FTSE 350 directors increased by 348% between 2000-2013. Over the same period the corporate performance of their companies rose by 140% in revenue terms and by 195% in terms of pre-tax profits. In other words, directors were paid, or paid themselves, roughly twice as much as their companies earned.

There is one other sting in the tail. When company fortunes slumped, did their directors’ remuneration fall proportionately? It most certainly did not. Performance-related pay is a very convenient fiction designed to inflate top remuneration at least twice beyond what the theory pretends to justify, while at the same time only ratcheting up in one direction and virtually never falling when company performance lags – a wonderful metric for greed.

2 Comments

  1. Barry Ewart says:

    I attended a public talk a few years ago by Dr Ha Joon Chang and have read the financial pages ever since. He recommended this so we all become economically aware citizens. It is amazing what you learn; my favourite story was from a few years ago – I think it was the CEO of Royal Dutch Shell but their profits fell by £10b in the first quarter and he got a bonus of £2.6m! Barclays profits have just fallen 21% to £2.6b and they expect to put aside £1.25b for foreign exchange rigging but their bonuses may be £2b. HSBC (of tax dodging fame) have been fined £2.4b for fixing foreign exchange rates and we await their bonus announcement. Lloyds fined £226m for fixing Libor have set aside £375m for bonuses plus their CEO is to get a £7m bonus making a total pay package of £11.5m, 10 senior managers there could get £23m between them and 800 senior staff £20m in shares. RBS fined £400m for manipulating foreign exchange markets and who made a loss of ££3.5b have set aside £421m in bonuses. (Sources – The Guardian, The Times, BBC). It’s time to end the gravy train at the top and have hefty taxes on the rich and windfall taxes on big business plus substantial financial transaction taxes making the financial sector pay for the mess they caused. This would wipe out debt and austerity at a stroke plus we would then have plenty for global public long-term investment to serve humanity and would still have plenty set aside for rainy days! The World has gone mad – according to the latest Forbes rich list there are 1,826 billionaires globally with the top 2 or 3 earning £70+ billion each yet we also have 2 billion people living on $2 dollars a day so a global living wage should also be part of our approach. Yours in international solidarity!

  2. James Martin says:

    Actually the biggest issue with PRP is not at the top (the bosses will always find ways to boost their own pay), but at the bottom. “Performance Management” is a tool used in both the private and public sectors to divide workers, create damaging competition over limited pots of ‘bonus’ money, and to rebalance power away from the unions and onto managers and HR. The Labour Party essentially goes along with this of course, sometimes without realising, other times (like with New Labour) completely knowingly.

    Funny thing is, there have been a number of very useful data analysis done by the LSE over the past couple of decades of PRP in a number of sectors, and the findings show very much that PRP systems either don’t raise or reduce productivity and demotivate and demoralise staff (unless the bonuses are very large, which of course is only for the bosses and very senior managers). But then as I’ve said the issue of ‘productivity’ is a smokescreen used to hide the real motives behind PRP in the workplace.

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