We have developed a proprietary tool to analyse the relationship between company performance and executive pay. It can be used as a point of comparison of one company to another, to the general market or to a specific industry sector.
To be able to compare companies in terms of the extent to which they do or don’t take any notice of performance when setting executive pay, we calculate the difference between the average movement in the performance indicator and the average movement in executive pay. The direction and the magnitude of the difference give a good indication of the degree of correlation for a particular company. We call this factor the “Correlation multiple”. Across the data base it gives us a common point of reference to make comparisons.
If, as can be reasonably expected Boards made their remuneration decisions by following the rate of improvement (decline) in the performance of the company we would expect to see a normal distribution of Correlation multiples. Our Performance Correlation ™ software can assist Boards in justifying remuneration decisions for the CEO and the Executive based on their own published performance data.
Although our outcomes are usually defined as degrees of positive or negative correlation there can also be a state of “Equilibrium”. We define companies in equilibrium to be those which increase executive pay at a rate which is very close to parity with the rate of improvement in the performance of the company (depending on the measure). Examples of companies which have consistently demonstrated either equilibrium or positive correlation (where performance has increased at a higher rate than executive pay) in the five years prior to the GFC include CSL, Bluescope, BHP and Woolworths.