Treasury Today Country Profiles in association with Citi
Treasury Today May 2003 magazine Buy print copy button

May 2003

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The sting in the tail of executive pay – pensions

As the values of quoted companies fall through the floor, it can be quite difficult to identify the companies in which the executives have made a positive impact for the shareholders.

In this light, the issue of the appropriate level of executive pay is a thornier one than usual. What constitutes an appropriate level of reward depends on perspective. The board will say that they need to pay the market rate to get the best. This can lead to personnel problems if the chief executive earns more in a couple of years than the company’s employees will earn in their lifetime.

But the problem of executive pay is not restricted just to salaries. Big pay awards also boost pension rights which are very expensive to fund and give rise to long-term executive pension liabilities. This is at a time when increasing numbers of companies have closed their pension funds either to new entrants or altogether, citing changing accounting standards as the reason. The granting of increased pension rights to executives in this environment does not just have implications for staff morale. It also has an implication for the balance sheet itself.

The fact that the long-term liabilities may only be a tiny fraction of the company’s turnover is not the point. Rather it is the likelihood that institutional investors will look upon the award of excessive long-term executive pension rights unfavourably that is the problem, especially when the awards appear to bear no relation to executive performance.

Maintaining good relationships with institutional investors is increasingly important for debt funding not just equity. Treasurers need to tap their liquidity when issuing bonds and CP. Companies simply cannot afford to ignore investors’ concerns when setting executive remuneration packages.