UK - The current system of executive remuneration is equivalent to "paying people to lie", a paper commissioned by oil giant BP claims.
The paper – written by Harvard academic Michael Jensen (pictured) – argues that remuneration structures are failing to influence corporate behaviour constructively.
Jensen claims that many current practices encourage manipulation of budget targets and misreporting to shareholders by participants at all levels in the company.
His paper – Remuneration: where we’ve been, how we got to here, what are the problems, and how to fix them – says rigid targets can lead to revenue being held back in certain periods. This is then brought forward to secure substantial bonuses in the following quarter.
Jensen claimed that bonuses should rise “smoothly” with performance to prevent manipulation or “gaming”.
The paper also says that employees frequently underestimate the true value of options they are awarded and recommends that an economic valuation should be provided to make greater use of options as incentives.
Investor lobby group Pensions Investment Research Consultants welcomed the suggestion. PIRC claimed that providing an economic value of options was useful for both the recipient and investors. It pointed out that it had been calling on companies to disclose the expected value of options for a number of years.
This week's edition of Professional Pensions is out now.
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