Effectiveness of incentive schemes questioned

News Article - 23 August 2006
Category: Business

Some incentive programmes designed to deliver improvements to the UK's top firms are falling below boardroom expectations, a new report has revealed.

The PricewaterhouseCoopers (PwC) research suggested that so-called Remuneration Committees are not being creative enough.

Although boards were found to be having success in using incentives, they often failed to result in an equivalent impact on profits, with similar-sized FTSE100 firms experiencing wildly varying returns to shareholders.

Tom Gosling, executive compensation partner at PwC, said that in many cases, the schemes failed to encourage executives to work better as they are wrongly structured.

"Some plans are just too complex meaning that they can be severely undervalued by executives and, in our experience, often discounted altogether."

He added: "Remuneration committees have never been busier coming up with sophisticated compensation schemes to do this."

Stock ownership was highlighted as one of the most effective incentives for encouraging executives to perform better, with pay indexed to shares a simple but productive tool.

The report also showed that chief executives at the top firms in Britain saw their pay rise by six per cent on average, in comparison to a high in 2000 of 14 per cent.

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