PwC challenges ‘myths’ about executive pay

PwC is warning that the current clamour for reform of executive pay will not achieve its aims because of a lack of robust evidence and says more needs to be done to ensure a new approach is based on realistic assessment of pay and performance

The firm has published a report identifying what it says are ‘four common myths’ that are widely believed and drive momentum for reform, but argues that none is supported by rigorous academic evidence.

The first of these is that companies ignore shareholders on pay. PwC says its analysis shows that over the last three years around one in 10 FTSE 350 companies received votes in favour of their remuneration report below 80%, the common benchmark for significant opposition.

One year later these companies improved their vote by 17% points on average. PwC says only around 2% of companies experience consistently high levels of opposition on pay votes, with the vast majority of companies responding to shareholder concerns.

The second issue is the ‘unjustifiable’ increase in CEO pay over the last three decades, with PwC calculating that 80% of the increase in UK CEO pay since the early 1980s can be explained by the six fold real increase in the size of a typical FTSE 100 company in that time.

The report states: ‘The CEO pay market has a number of weaknesses, but overall pay levels are more readily explained by rational economic forces than is commonly assumed.’

Thirdly, PwC challenges the widely held view that there is no link between pay and performance, saying that most analysis of pay and performance ignores basic adjustment for company size and fails to take account of the impact of shares executives already hold. Allowing for these two factors, performance explains nearly 80% of the variance in total CEO pay in the UK, the firm says.

The final point relates to the idea that incentives do not work, with the report claiming the overwhelming evidence shows that incentives do influence CEO behaviour, just not always in the way intended.

It states: ‘Evidence shows that overuse of performance based incentives can lead to short-termism. By contrast, high and long term shareholding are found to encourage better long-term performance.’

Tom Gosling, head of reward at PwC, said: ‘Executive pay needs reform, but it’s vital we focus on the right issues if that reform is going to be effective. If we wrongly diagnose the illness then the cure won’t work. We need to base reform on robust evidence.

‘The most important area for reform is pay design, to ensure pay encourages long term thinking and only provides the highest rewards for sustainable long term performance.

‘But it’s also vital for boards to improve oversight of pay fairness and to explain how they achieve this in a convincing way, to rebuild public trust in the pay process.’

PwC’s  ‘Time to Listen’ report is here.

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