Executive pay practice needs repair, says CFA

Executive pay practice is unnecessarily complicated and needs repair according to research conducted by the CFA Institute Centre for Financial Market Integrity in collaboration with the European Commission.

The survey on executive compensation, conducted among members of the CFA Institute based in the European Union, revealed that almost two thirds (64%) of respondents believe that executives receive the majority of their variable compensation no matter what the company’s circumstances may be. This, highlighted the survey, demonstrated an industry perception that, despite the economic crisis, executives are still receiving rewards and many investors feel that the variable element of executive compensation is received as an entitlement.

Almost half (46%) of respondents agree that executive compensation formulas are needlessly complex. The CFA Institute would like to see transparent formulas linked with personal achievement in meeting long term shareholder interests.

In addition, 46% of respondents disagree that the variable component of executive compensation should be proportionately reduced in favour of fixed salary compensation. This demonstrates that members would like to see variable compensation remain, perhaps leading to lower pay packages going forward.

Charles Cronin, head of the CFA Centre for Financial Market Integrity (Europe, Middle East, and Africa) said: “Incentive‐based pay is good but it must be tied to meaningful performance based metrics, including shareholder returns. It is very concerning to see guaranteed incentives wrapped up as performance based bonuses.†

“At the CFA Institute Centre, we feel strongly about full transparency, and we encourage straight forward and understandable objectives, so that the average shareholder can cast their say on pay vote with some understanding. As it stands, the incentive metric must contain a shareholder value component, otherwise we will see poor performance being rewarded and shareholders losing out.”