updated on 25 January 2005
QuestionI keep reading about large payoffs for executives departing publicly listed companies. Isn't it about time that such organisations aligned the financial rewards available to their executives more to the performance of the businesses in the same way that the private equity industry does?
Shareholders have expressed dismay that while stock markets and corporate profits have slumped, executives continue to take excessive remuneration and secure lucrative payoffs when they depart, despite a drop in shareholder value.
There is no shortage of reasons to prevent "rewards for failure" and promote performance linked payoffs. Although existing remuneration strategies in publicly listed companies have however tried to align executives' interests with those of shareholders, the performance of executives is often judged by more than share value. In the absence of explicit links with shareholder value growth, it is likely that details of fat-cat payoffs will continue to be reported for some time to come.
Contrast this with the 'ideal world' of private equity, where not only do key executives have to invest personal funds, thus linking their financial wellbeing to the success of the company from the outset, but the majority of their reward comes from increased shareholder value. This ensures good 'goal alignment' with shareholders. Far from rewarding failure, the private equity industry seeks to minimise cash outflow at the end of employment with what might be considered draconian devices such as liquidated damages clauses, and 'good leaver/bad leaver' valuation provisions.
Clearly there is a downside to directly linking remuneration to share performance in any business. Many commentators are concerned that imposing restrictions on 'golden goodbyes' in the listed arena will inevitably lead to a demand for upfront 'golden hellos' and increased basic pay to compensate for harsher severance terms. Furthermore, by making performance solely based on one narrow measure, directors' thinking could be clouded by short-term strategy that ignores other goals.
Mark Spinner is head of Eversheds' private equity team. He specialises in all aspects of private equity transactions, acting for both institutional investors and portfolio companies/management.