The current idea that big bonuses and high salaries result in better company performance is just a ‘myth’, says a new report from the High Pay Commission (HPC). The report – What are we paying for? – is an in-depth examination of the relationship between boardroom pay and corporate performance over the last 10 years. Based on research supplied by the IDS Executive Compensation Review (ECR), the report shows that between 2000 and 2010 the total earnings of all FTSE 350 executive directors went up by 108 per cent, while over the same period the value of these same companies went up by just 8 per cent. This represents a 100 percentage point mismatch between how much directors earned and the worth of their companies.

The ECR data used in the report compared the various elements of FTSE 350 pay packages – salary, bonus, share option gains and long-term incentive plan (LTIP) awards – with several key corporate performance metrics – market capitalisation, year-end share price, pre-tax profit and earnings per share (EPS). No matter how the data was cut, the clear impression is given that there is very little relation between how much directors took home and company performance.

Take annual bonus payments as an example, which on average went up by 187 per cent over the 10 years. When changes in annual bonuses received were correlated with changes in pre-tax profit and EPS no discernable relationship could be detected. A similar story was evident when long-term incentives such as LTIPs and share option gains were examined. From the ECR research, the HPC highlights some other notable findings:

• In 2002, for on-target performance, FTSE 100 lead executives received a bonus worth 48 per cent of salary. In 2010, for the same level of performance, a FTSE 100 lead executive’s bonus was worth 90 per cent of salary

• The increase in bonuses has not come at the expense of absolute rises in salary, with salaries increasing 63.9 per cent over the last 10 years

• In 2002, the median maximum grant of shares that a FTSE 100 lead executive could be awarded was 100 per cent of salary. In 2010, this has risen to 200 per cent of salary

• The average value of LTIP awards paid out to lead executives across the FTSE 350 has gone up over 700 per cent since 2000.

Commenting on the report, Deborah Hargreaves, Chair of the High Pay Commission, said: ‘The evidence exposes the myth that big bonuses and high salaries result in better company performances. There has been massive growth in what has been termed as performance related pay, yet no such corresponding leap forward in company performance’.