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27/02/2017
Executive pay is too complex and needs to be replaced by something that is more transparent and can be communicated clearly to all stakeholders, including remuneration committees. This is the view of EY in a new report proposing a ‘one element pay model’.
Under the model, each executive joins the business at an agreed benchmark value, which includes an element for pensions and other benefits. Eighty per cent of this benchmark value is then paid in 12 equal tranches through the year, with the remaining 20% paid in two chunks in the following financial year on an ‘at risk’ basis. This 20% could be forfeited if performance targets are not met, but could also be increased (with a cap of 20%) for exceptional performance. An agreed percentage of the executive’s benchmark value would also be invested in the equity of the business, to be held for the long-term.
The EY report says:
‘When companies operate this model, the remuneration committee should be freed from the burden of bonus calibration and metric design to focus on areas where it can really add value such as true performance management.’