FTSE 100 chief executive officers (CEOs) who served continuously in the lead up to, and through, the downturn are more likely to be penalised for poor share performance, and rewarded when it improves, according to research carried out by the Harvey Nash Board Practice, and the London Business School.
The research found that during the period between January 2 2006 and December 31 2010 changes in share price explained about 30% of the variation in direct pay of the CEOs, suggesting that it takes longer to judge the contribution CEOs make to the performance of the company, a critical factor to be considered by non-executive directors when setting the CEO’s compensation.
The research also revealed that consumer and retail organisations had a much higher correlation between CEO pay and share performance than other sectors, and 20% of the change in direct pay of CEOs in FTSE 100 organisations can be explained by share-price performance.
Albert Ellis, CEO of Harvey Nash, said: “The results are striking. They show very clearly that there are significant factors other than share-price performance, which come into play when non-executive directors set CEO compensation and incentives.
“The most important finding is that successful FTSE 100 CEO pay in the longer term appears aligned with the success and performance of the organisation as reflected in the share price over time.†
“Churn at the top of large organisations has increased as a result of the financial crisis. Therefore, there is little or no correlation between remuneration and share-price performance in the short term in these organisations.”
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