'Career shares' could give directors a long-term incentive

SOARING executive pay in the City is unlikely to be tamed unless there is greater support for schemes that prevent directors from cashing in their shares for up to ten years, according to research.

Brian Main, professor of business economics at the University of Edinburgh Business School, is advocating the greater use of "career shares" - schemes that create genuinely long-term incentives for company directors.

In a study of executive pay at FTSE 350 companies, to be presented at the David Hume Institute next week, Main argues that career shares would prevent controversial situations where directors are able to cash in their shares shortly after leaving a company even though that firm is left in turmoil.

At the moment, long-term incentive schemes usually only prevent executives from vesting shares for up to three years but career shares go one step further, with some academics suggesting that a period of up to ten years would be appropriate.

Main, who is a former director of the David Hume Institute, argues: "Such an arrangement provides a longer-term horizon on pay performance - and encompasses a mechanism for settling up or clawing back reward for what turns out to be illusory or non-sustained increases in performance."

Although remuneration committees are in theory the best method through which to stem spiralling pay for those at the top, Main argues that they tend to mimic what other companies are doing and "err on the side of generosity".

He blames the marked increase in executive pay on a combination of factors but it is largely "an unintended consequence of institutional change in the governance arrangement of UK companies".

Shareholders have to share some of the responsibility, he argues, as a "shift" in their attitudes has encouraged "payment by results".

Main's full paper will be discussed at the Royal Society of Edinburgh on Wednesday.