The true about performance-related pay

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While the average new hire’s salary is 3% down on 18 months ago, pay packages for FTSE 350 bosses have soared 700% since 2002 – despite company share prices spectacularly failing to correspond.
A report by The High Pay Commission revealed that most of the jump in directors’ renumeration came in the form of annual bonuses, which now account for 90% of their salary compared with 48% nine years ago.

While executives’ wages without additional perks have risen by 63%, the FTSE 350 share Index has grown by only a third of that figure at 21%. In contrast, total pay levels for the average UK worker have risen by a mere 27% since 2002.

Deborah Hargreaves, the chair of the Commission, which is backed by the left-leaning Compass group and the Joseph Rowntree Charitable Trust, said: “The evidence exposes the myth that big bonuses and high salaries result in better company performances. There has been massive growth in what has been termed performance-related pay, yet no such corresponding leap forward in company performance.”

She suggested that increasingly complex renumeration schemes, which were designed to tie share-based rewards to company performance, had simply served to cover up what executives were really paid.

“Corporate governance reforms attempting to link pay with performance appear to have done little more than add to the huge complexity of executive packages, reward schemes and bonuses that make up the pay of FTSE 200 directors,” Hargreaves said.

Performance-related pay

A second study among 152 organisations also cast doubt on the value of performance-related pay as an incentive for lower paid workers because the awards on offer were deemed too low to be motivational.

According to researchers XpertHR, just over half of employers used such tools to boost individual and organisational performance (92.9% respectively) as well as focus attention on key objectives and motivate staff (88.8% respectively).

But the median paybill increase from which performance-related pay rises were awarded last year amounted to only 2.7%, leaving little scope for employers to differentiate between poor and exceptional performers.

Although less than a quarter of organisations employing such schemes formally evaluated their effectiveness, most believed that they were at least partially achieving their goals. But they felt that the most positive effects were seen among already high performers, while they made little difference or had no effect at all on more average and/or poor performers.

A third study in the shape of the Reed Job Index, meanwhile, revealed that the salaries being offered for new jobs are now 3% lower in real-terms than they were in December 2009 when the study first began.

Despite a 20% increase in the number of new jobs available in August compared with a year ago and a 22% jump on 18 months ago, wages dropped a huge 2% in August alone when compared with July.

Although consumer-oriented sectors such as retail saw large falls in demand for staff as did the public sector, this situation was more than offset by the creation of lots of new jobs for qualified accountants, purchasing professionals, admin, marketing, media, digital and creative staff.

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