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Executive pay should focus more on long-term performance, says Kay report

Economist John Kay published his final report on UK equity markets on Monday

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Executive pay should be structured to incentivise sustainable long-term business performance and avoid short-termism which is a “problem in UK equity markets”, said a senior UK economist in a government-sponsored report published on Monday.

Short-termism caused by a decline of trust and the misalignment of incentives is a problem in UK equity markets, said respected economist John Kay in his final report into UK equity markets.

In his review, set up by business secretary Vince Cable to look into the issues surrounding the capital markets, Kay said there was no single reform that could solve the problem.

Realigning executive pay is just one of several reforms Kay recommended in his final report published on Monday.

Other recommendations include companies refocusing on long-term outlooks rather than managing short-term earnings expectations and announcement. Kay has already said in his interim report issued in February that quarterly basis may adversely affect the behaviour of companies and investors.

The report also said the Stewardship Code should be changed to incorporate a "more expansive form" of stewardship; directors, asset managers and asset holders should adopt good practice statements that promote stewardship and long-term decision making; and companies should consult long-term investors over major board appointments.

“Trust and confidence, or their absence, are the product of the prevailing culture. Incentives matter: not because, as some people crudely think, financial rewards are the only human motivation – although there are some people of whom that is true, and many of them are to be found in the financial sector.” Kay said in the report.

Cable called the report “an important and timely contribution, adding “since becoming business secretary I have been a vocal advocate for a new model of responsible capitalism based on creating long-term value rather than short-term profit.

The business secretary said he would consider Kay’s recommendation respond later this year.

Simon Wong, a partner at Governance for Owners, a fund management firm, broadly welcomed the proposals but said Kay could have gone further in his analysis.

Wong pinpointed the role of pension funds in the equity ownership chain and opportunities for reform, incentives to spur institutional investors to engage more meaningfully with investee companies and how the proposed ‘investors’ forum’ differs from existing UK shareholder bodies.

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To read the report click here


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