The CFA (Chartered Financial Analysts) has recently published a report on research it commissioned to examine the effectiveness of the pay arrangements of CEOs in large UK companies: CFA report - Measuring and rewarding performance: Theory and evidence in relation to executive compensation
We have highlighted the key findings and provided Towers Watson’s view on how companies can make sure their remuneration arrangements for executives are aligned with business performance. Two underlying concerns guided the CFA’s investigation: The first is that current executive reward arrangements emphasise the interests of equity holders but neglect the other important source of a company’s capital, namely bondholders. The second concern is that the usual performance metrics deployed when designing incentive reward for directors do a poor job of ensuring that the company earns a sufficient return in the light of its cost of capital.
While the CFA’s findings are interesting and important, we believe that they need to be considered in a framework that allows not just for a company’s current income generation but also for its growth prospects. The appropriate balance of performance measures will depend on where a specific company is in the growth/maturity lifecycle.
We welcome you to download our full report to find out more.