The short term holds sway on executive pay

EVEN after years of efforts to curb executive excess and link pay and rewards to lasting success, the overwhelming majority of company directors are still paid on the basis of short-term financial performance. This is the key finding of research commissioned by the Centre for Tomorrow's Company, the industry-sponsored think-tank dedicated to encouraging business to take the "inclusive" or "stakeholder" approach.

The report, carried out by Mori and published last week, also finds that only a minority are given incentives linked to such inclusive behaviours as improving customer loyalty, employee attitudes and innovation.

The report said that levels of pay in the market in general, and in competitor companies, were a prime consideration in setting directors' pay. After surveying senior executives in 500 top companies last autumn, it was found that financial performance was among the most important reward criteria: it was cited by 94 per cent of respondents. In contrast, productivity rated 17 per cent, customer satisfaction and loyalty 17 per cent each, public opinion/regulators 6 per cent, media comment 4 per cent and staff turnover 2 per cent.

The results led Stuart Hampson, the head of the John Lewis Partnership retail group who chairs the centre, to say: "Of course, the current financial performance of a company matters. But shareholders should be even more interested in what management is doing to grow their investment in the future.

"British companies are not rewarding the behaviour that we all know will lead to lasting success. Remuneration committees should be focusing on how management is promoting the quality of the workforce, the loyalty of customers, beneficial relationships with suppliers and the reputation of the business at large. They should look to the future, not to the past. That is the kind of leadership British business needs."

The centre was established in 1996 after the Inquiry into Tomorrow's Company by the Royal Society for the Encouragement of Arts, Manufacturers and Commerce concluded that there were too few world-class companies in Britain. It had added that this could be corrected through an inclusive approach to the five key business relationships - customers, shareholders, suppliers, employees and the community - which grant the "licence to operate".

The centre has developed the notion of "five-plus-one": these five, plus leadership, the "core quality" that aims to add value to the key relationships and enables the organisation to live out its core values.

Tomorrow the RSA is hosting a seminar at which Warren Bennis, the highly regarded writer on leadership and consultant to presidents and businesses, will talk about how the complexity of the business world can make it counter- productive to rely on the concept of individual leaders and "lone rangers" to solve problems. He will draw on his latest book, Organising Genius, to develop the idea that today's organisations need "great groups" and "great group leaders" and creative thinking from all staff rather than just a few at the top.