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Executive pay faces radical overhaul

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According to new research by KPMG executive pay faces a radical overhaul because so many are approaching the maximum allowable level.

That begs questions about how stretching performance requirements have become – but also leads to KPMG’s prediction of big companies increasingly turning to tailor-made executive pay packages.

The findings come at a time when investors are becoming increasingly concerned that there is a widespread failure to link remuneration strategies and performance to the actual strategy of the business.

Carl Sjostrom, a partner in KPMG’s Executive Compensation practice in the UK, said: “We would argue that the signs we are seeing now – incentive awards approaching maximum opportunity levels, together with pension short-falls being replaced with cash payments alone, one-off incentives and companies testing private equity type models in a quoted environment – are early indicators that a sea change is about to happen.

“Companies will need to begin to design incentives that deliver higher pay for some but in return for clear, robust linkages to the performance that drives the long term value of the company.”

KPMG’s Survey of Directors’ Compensation 2006 revealed that the median take home pay of a FTSE 100 chief executive was £2.3m in 2005. The average increase was nine per cent which outstripped the average basic salary increase of six per cent to £703,000). This reflects the increasing trend towards performance-related elements in remuneration packages.

Where annual bonuses are concerned, this could suggest that performance is improving against targets, but it could equally indicate that performance requirements are becoming less stretching. For performance share plans, it means that even though most plans are operated in combination with other long-term incentives, awards are continuously increasing.

Carl Sjostrom added: “Too many companies are paying executives for achievements against targets with marginal relevance to the corporate strategy and the value proposition it puts to shareholders. And this is not necessarily to every executive’s liking either.”

KPMG believes there are lessons to be learned from the private equity industry.

“It is important to remember that, just like any other strategic tool, compensation plans cannot work miracles,” said Carl Sjostrom.

“But they can help organisations achieve their objectives. However, it is interesting to see how the private equity industry has flourished over recent years as executives have been provided with serious earning opportunities in return for delivering clearly defined goals.”

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Annie Hayes

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