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If something good can be salvaged from the Tony Ball saga, in which he is demanding a potential £20 million reward over five years for running ITV, it ought to take the form of a rethink on the use of long-term incentive plans (LTIPs).
The amount of money Ball requires to get him out of bed on a Monday morning is not the issue — though any board which agrees to pay anything like that ought to be referred immediately to a psychiatrist. Rather, it is the mechanism of long-term incentive plans which is fundamentally flawed. Ball's is a case of egregious greed and arrogance, and will eventually pass from the headlines.
The problem with Ltips is fundamental far more expensive from a national point of view, and will continue to deliver bad results long after Ball is forgotten. In other words, it is not the pay which should be the issue but the flawed measures of performance used to justify it.
These on a regular basis deliver vast amounts of money to relatively low-profile executives who have done very little to deserve it and have created a whole cadre of undeserving rich. There is no mystery as to why this should be so. These plans tend not to have one target, but instead have a series of benchmarks with a proportion of the total bonus attached to each for the understandable reason that trying to reduce a company's performance to a single number is asking for trouble.
No one can forecast the future. Unfortunately, in laying down the series of performance targets by which executives will be judged for the coming three years, remuneration committees are trying to do just this.
Because the future is unknown, they get it wrong. Some of the “demanding” targets prove to be dead easy, others turn out to be so hopelessly out of reach they provide no incentive at all.
The most damaging, however, are the substantial number which are attainable but which, with the passing of time turn out to be irrelevant because the company's circumstances have changed. Executives follow the money, so they knowingly waste their time, doing things they know to be useless in order to deliver the “performance”. This is the norm, not the exception.
And while in good times when profits were rolling in, no one seemed to bother too much, these are no longer good times. As a result, there are increasing tensions across the land between executives and remuneration committees — tensions that are likely to get worse unless the system is reformed.
One of the firms that makes a lot of money advising on remuneration strategy is so disenchanted with LTIPs it is advising all its clients to scrap them. Needless to say, its clients fully accept its arguments because they can see how flawed these measures are — as can the executives in the thick of things — but they do nothing about it.
They refuse to change rather than risk a confrontation with their institutional shareholders whom they believe, rightly or wrongly, to be totally wedded to LTIPs. Thus they continue to shell out largesse to the undeserving rich in their executive teams.
And at the rate of £1 million here, £500,000 there and £750,000 somewhere else, they very quickly account for far more shareholder money across the system than could be dreamt of, even by Tony Ball on speed.
The institutional shareholders are probably not wedded to the system but they have a guilty secret. This is that though they make a great song and dance about executive remuneration, they don't actually understand it. Publicly, they deny this of course — as they do most things which cast doubt on their competence.
Privately, however, many will admit that a typical Ltip is so complicated and so specific to the workings of the company concerned that they have not got a clue whether it is testing or not. They basically make their judgments by looking at the maximum amount that could be paid out, and by forming a judgement of the quality of the chairman of the remuneration committee and his advisers.
They are, however, paranoid about executives moving the goalposts after the deal has been struck. So they refuse to have these things reopened after they have been agreed, even when they have become irrelevant.
This is why the irrelevancies, when they happen, continue unchecked and uncorrected, and executives collect money which they have earned under the terms of the plan but which have very little to do with what the company really needs.
There is a way to solve this, though it would probably put most remuneration consultants out of business, so there is no chance that they will ever push it.
Quite simply, all one needs to do is set an annual bonus target for the executive and to reward him or her not in cash but in shares — with the caveat that these shares do not vest for five years.
The target is near enough to be made relevant and to stay relevant, the value of the shares provides the incentive — and the five-year lock-in provides the longer-term alignment with the broader body of shareholders.
What could be simpler than that?
