Julia Irvine 17 Feb 2017 02:18pm

PwC challenges "myths" over executive pay

Big Four firm PwC has expressed concern that moves to curb excessive pay in the UK’s boardrooms are motivated by popular belief rather than real evidence and so are unlikely to have the desired effect

This, it warns, will inevitably lead to further public disillusionment with the business community.

The firm has identified "four common myths" that are providing the momentum for reform – companies ignore shareholders on pay, the rise in chief executive pay over the past 30 years is unjustifiable, there is not link between pay and performance, and incentives don’t work.

“These myths matter,” it says, “because they can lead to false conclusions and risk reform shooting at the wrong target.”

The first myth can be disproved by looking at the facts. In the last three years, approximately one in 10 FTSE 350 companies saw their remuneration report receive less than 80% support from shareholders (80% being the common benchmark for significant opposition).

Since the vast majority of companies do respond to shareholder concerns, PwC says, the following year those companies with dissenting shareholders saw a rise in support on average by 17%.

The firm goes on to point out that 80% of the increase in CEOs’ pay since the early 1980s corresponds to a six-fold real increase in the size of a typical FTSE 100 company over the same period.

“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.”

The third myth, about pay and performance, has come about because most analysis, PwC suggests, fails to make adjustments for company size or to take into account the effect of directors’ existing shareholdings. Add in these two aspects in, it says, and nearly 80% of the variance in total CEO pay is attributable to performance.

Finally, it says, there is clear evidence that incentives do influence CEO behaviour, just not necessarily in the way that was intended.

Overuse of performance based incentives, for example, can result in CEOs adopting a short-term approach to the business. However, there is also evidence that large and long-term shareholding encourages better long-term performance.

PwC’s head of reward Tom Gosling says that reform needs to be based on robust evidence to ensure that the problems with excessive pay are dealt with satisfactorily.

He calls on the government to focus on pay design so that pay 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.”

Today is the deadline for comments on the government’s Green Paper on corporate governance, which contained proposals for restoring public confidence in the way companies are run.