In the wake of Greenbury, experts have been caught up in the frenetic search for new ways to judge and reward top executive performance.
Greenbury is good for business. Not yet demonstrably in a long-term, macroeconomic sense, for this remains to be proven. But in a micro sense, the verdict has already been returned: the code has been great for remuneration experts, accountants and City lawyers alike.
Business is booming as FT-SE 100 companies seek external advice on how to structure top executive incentive schemes along the lines recommended by Sir Richard as an alternative to those much vilified share options.
Not that Greenbury wanted to do away with options altogether; he merely pointed out that with them fortunes could be made irrespective of management ability, should external circumstance, such as a bull market, ramp up the share price. And he emphasised that traditional options do nothing to encourage directors actually to hold shares in the companies they run.
Much better, Greenbury concluded, for firms to look at alternative long-term incentive plans (Ltips), particularly performance share plans which set executives fairly stiff performance criteria over a given period relative to a selected peer group. The reward then takes the form of a bundle of shares (or cash to buy them) which participants are encouraged to hold in the company for a specified minimum period.
In the year since Greenbury's conclusions were published, remuneration committees have burnt the midnight oil (and/or paid others to burn it for them), trying to fathom out reasonable performance criteria and the right financial measures against which to judge their top dogs. Progress has been relatively swift: up to 50% of FT-SE 100 companies are now reckoned to have introduced performance share plans, and research conducted by New Bridge Street Consultants late last year showed that at least 13% of these firms have ruled out granting any further executive options. While performance share plans have been growing in popularity for at least the last three years, it is the last 12 months have witnessed frenetic activity on this front.
Happily all the fuss and flurry is creating a kind of consensus - for the time being at least. The model which is currently proving most acceptable is one where executives start to qualify for a bonus if their organisation comes in at the median performance level for the group against which it is being compared (so number 50 if the FT-SE 100 is the chosen index, as it usually is). Rewards are calculated on a sliding scale until the company can class itself as one of the top 25% against its peers, at which point executives usually qualify for the full bonus. Performance is generally measured in terms of total shareholder return (that is, share price plus dividend) relative to that of the comparator group over a three-year period, and shares must typically be held for at least two years after they have vested (been awarded in non-expert speak).
The maximum number of shares that may vest three years hence is usually calculated when the plan is set up; the remuneration committee establishes what percentage of salary a maximum award of shares should represent (typically 100% of year one salary) and then converts this sum into the number of shares it would currently buy. From then on, instead of working towards a bonus of £500,000, say, in three years' time, the executive is working towards a bonus of 10,000 shares (if current price of each share is £50), at whatever price they happen to be when the performance period elapses.
This model is considerably tougher than some of the performance share plans which gained shareholder approval at the back end of last year, models which saw executives qualifying for at least some of their bonus if they brought the company in 69th out of 100. And since the beginning of this year, companies such as Prudential Corporation, which see 59th out of 100 as a reasonable starting point, are having a noticeably harder time persuading shareholders of the strengths of their case. Toughening attitudes probably mean the qualifying level will shift again. 'The 50th percentile still does not sound too demanding,' says Guy Jubb, corporate governance manager at Standard Life, the insurance mutual which voted against the Pru's plan. 'In fact there is a question in my mind whether we should remain at that level or whether we should actively push it to 40.'
At the heart of the argument about where performance criteria should be pitched lies the question of what the performance share plan is intended to do. Jubb is quite clear where he stands: 'Performance share plans should reward participants for high and outstanding performance, not for mediocrity.' Those in the other corner of the ring (which the Financial Times has dubbed the 'all carrot-no-stick' corner) see things differently, of course, arguing that if performance criteria are really tough, executives will despair of achieving them and base salaries will consequently inflate at a rate of knots. Certainly low base salaries are one of Prudential's justifications for its new plan, according to spokesman Mike Davies. 'We have moved away from giving executives high base salaries in favour of rewards tied to performance,' he says. 'Given a low salary base, we felt hurdles should not be too high.' Davies has an ally in David Tankel, director of New Bridge Street Consultants. 'Most good schemes should work so that you get something for doing not too badly,' he says.
Under plans which use the company's total shareholder returns against those offered by the comparator group, it is perfectly feasible, inevitable even, that big payouts will occur not just when an executive is doing 'not too badly' but when a company's share price is actually falling, but simply less swiftly than that of its peers. It does not take much imagination to foresee the headlines that will appear when that happens - Fat Cats, The Sequel. 'Outperformance of an index doesn't itself necessarily demonstrate sustained underlying financial performance by a company,' elaborates Michael McKersie who is manager of investment affairs with the Association of British Insurers (ABI).
The trouble, agree the experts, is that every possible stand-alone measure of performance, be it relative or absolute, is in some way flawed. 'There is no perfect solution,' comments Jubb. 'Every measure has its imperfections.' This said, his preference is for companies to base their measures on financial metrics such as earnings per share (eps) growth, return on capital, cashflow or gross margins. Others disagree, of course.
'Total shareholder return is the most readily defensible measure to shareholders,' say Hay Management Consultants. 'If total shareholder return is high, shareholders have done very well.'
Perhaps the most complete solution to date is the view proffered by the ABI's investment committee that, where total shareholder return is used, it should be supplemented by a measure of financial performance such as earnings per share growth at least matching that of the retail price index: this has the merit of combining a relative share price measure with a more direct financial performance measure.
Once experts have cracked the measures issue, there still remains the question of the comparator group that is selected: most schemes introduced to date have simply adopted the FT-SE 100 lock, stock and barrel but this clearly means that apples are being compared not only with oranges but with plums and bananas too. To compare the performance of a pharmaceutical firm with that of a financial services company or of an engineering giant is not particularly logical - just straightforward. Admittedly when remuneration committees have tried to set up more tailored comparator groups, they have run into problems.Yet some explorers are making headway, with TI Group, for example, opting to compare itself against an index it has chosen of 24 predominantly engineering and heavy industrial companies.
Even when these problems are solved, there are plenty of others for experts to investigate. And remuneration committees, worried about Greenbury disclosure recommendations and the public scrutiny which all executive pay issues now seem to attract, are fairly certain to continue to seek outside advice to help justify the packages they agree. The Big Six and their legal cronies can rest assured: one way or another it looks like advisers' lights in the City will be burning late for a while to come.