“If an organisation selects the wrong performance measures there will not be a link between CEO long term incentive (LTI) pay and company performance,” warned Chris Blair, CEO of 21st Century.
According to Blair, who addressed reward professionals at the recent annual conference of the South African Reward Association (SARA), the issue is not necessarily the pay to performance ratio, but rather how performance is measured. Businesses must find a way of ensuring that performance is assessed in accordance with its unique situation and industry and not try to fit a round performance peg into a square remuneration hole.
Insight into impact
21st Century, a remuneration and reward consultancy based in South Africa, undertook a survey to determine definitive, statistically tested answers as to which financial measures most closely correlate with CEO LTI pay in South Africa. The survey examined 254 listed companies and ensured a spread over five industries – transformative, extractive, distributive, professional services and personal services.
“The results were analysed to determine which of 11 selected financial indicators of company performance were the most in use and across which industries, and which had positive correlations with CEO LTI pay across these industries in South Africa” says Blair.
The transformative (construction, building, utilities, energy and manufacturing) and extractive (agriculture, paper, mining oil and gas ) industries were more likely to offer rewards that correlated positively with company performance when using performance measures such as earnings before interest, tax and depreciation, fixed assets and profit after interest and tax.
The distributive (transportation, logistics, communication, wholesale and retail) industry showed a positive correlation between CEO LTI pay and financial measures such as capital employed and profit after interest and tax.
The study found no reasonable correlation between the chosen financial measures and CEO LTI pay in the professional services (banking, finance, insurance, real estate, engineering) industry.
Finally, in the personal services industry (domestic services, hotels, repair, entertainment and leisure), a positive correlation was found between CEO LTI pay and capital employed, change in share price and Total Shareholder Return measures.
“The study clearly showed which financial measures had a positive correlation with CEO LTI pay and business performance as well as those that had no correlation or showed inconclusive results,” concluded Blair. “It also shows that executive remuneration needs to be more closely connected to company results and performance and that identifying this connection can be different for each industry and organisation. One benchmark does not fit all.”
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