Not Badly Paid But Paid Badly

The following essay was the winning entry in the PricewaterhouseCoopers Second Annual European Shareholder Value Award held in partnership with EBF and Financial News. Written by Paul Lee, a corporate governance analyst with Hermes Investment Management, the trenchant analysis of the limitations of the current system for remunerating senior managers was unanimously declared the winner.

“Executive managers are not, in general, badly paid, but many of them are paid badly. Executives deserve to be well paid, because the good ones are capable of creating enormous value for the companies and underlying shareholders that employ them. Most are in fact well paid, but there is an increasing disconnection between that pay and the shareholder value that the executives create.”

In short…
– There is an increasing disconnection between the value executives create for shareholders – often enormous – and the size of their pay.
– US accounting and tax structures, which are not advantageous to those footing the bill, are dictating best practice in executive remuneration in Europe and Asia. These rules, if necessary, need to be changed.
– A move away from options, which have shown themselves to be inefficient, should be considered. Money made by managers in the technology sector often did not reflect their efforts, while the trend towards repricing has allowed them to benefit from the upside and be protected from the downside.
– Shareholding requirements – where not only board members but managers down the organisation hold substantial quantities of stock – should be introduced by companies.

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