Bosses’ bonuses give little weighting to staff well being

Executive bonuses across FTSE 100 companies are massively skewed to financial targets with little emphasis on diversity or the wellbeing, training and engagement of staff, according to a new study.

The study by the Chartered Institute of Personnel and Development (CIPD) and the High Pay Centre found that for every pound a FTSE 100 CEO could earn for meeting an employee-related target, they could potentially receive £41 for meeting a financial metric.

The report says: “The findings point to a clear disconnect: while ESG measures are often stated as important in business strategies, they are omitted from the measures that are considered for performance-related executive pay.”

The research found that only 34% of FTSE 100 companies used employee-related metrics in their CEO performance-related pay package. Amongst the companies that used these metrics, they account for just 5.9%  on average of the maximum incentive pay available to CEOs. Across the FTSE 100, employee-related metrics accounted for only 2% of maximum incentive pay. By contrast, all companies analysed in the research use financial metrics  for their performance-related pay packages. These metrics had an average weighting of 82.4% of total maximum potential incentive pay.

For short-term annual bonuses, employee-related metrics typically accounted for 11.2% of the potential maximum CEO bonus awards at the companies that used them. For long-term incentive plans (LTIPs), employee-related metrics accounted for an average of just 9% of the total potential value of the plan at the companies that used them.

The three most used employee metrics for bonuses were: Health and safety (12 companies); Employee engagement (10); and Diversity and/or inclusion (9). For LTIPs, the three most used metrics were: Employee engagement (4 firms); Conduct/culture (2); Diversity and/or inclusion (2).

The High Pay Centre/CIPD report notes that several studies suggest that the use of environmental and social metrics in CEO pay plans has increased in recent years. However, the report says it remains far from standard practice.

It says this could be due to the dominant role that shareholders play in UK corporate governance and to the fact that there is much less consensus on how to measure performance in terms of good employment practices and corporate culture.

Meanwhile, Nasdaq, the US’s financial exchange, has proposed rules that would require companies listed on the exchange to have at least two “diverse” board directors. The proposal would mean that most companies listed on Nasdaq would have to include at least one director who identifies as female and one who identifies as an underrepresented minority or LGBTQ. Nasdaq will need to seek permission from the Securities and Exchange Commission to enforce the rule.

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