• Even on the most generous interpretation, just 16% of total FTSE 350 annual bonus conditions positively encourage spending on innovation compared to 39% which positively discourage it
• Long-Term Incentive Plans are even more strongly skewed towards metrics which discourage executives from innovating at a ratio of 6:1
• This happens despite the fact that companies, investors and regulators agree on the need to promote innovation and suggests they should pay closer attention to whether remuneration conditions are likely to stimulate innovation.

Researchers analysed publicly available information about the pay and bonuses of executives at the 350 biggest companies in the UK and compared them to OECD guidelines for measuring innovation.

The report, titled ‘The invisible drag on UK R&D: How corporate incentives within the FTSE 350 inhibit innovation’, found that, in aggregate, remuneration packages are weighted towards conditions which discourage innovation spend rather than positively encouraging innovation in a ratio of about 3:1.

Even Long-Term Incentive Plans, which are meant to encourage longer term thinking from executives, do little to encourage executives to innovate. Such plans typically only extend to three-years, a fraction of the time it takes to complete a successful R&D project, and are again typically based primarily on metrics which discourage innovation at a ratio of about 6:1.

Most companies have to put remuneration plans to shareholder vote in 2020 and to secure prosperity post-Brexit, UK businesses need to recognise innovation as a key driver of long-term growth and ensure that they are not inadvertently discouraging this. Nesta has made three recommendations to support this aim:

• Companies should examine their remuneration packages to ensure that they encourage the pursuit of innovation and long-term value creation;
• Investors should use their power to demand better incentives for investment in innovation, as many companies begin the three-year cycle of shareholder votes of remuneration packages;
• The Financial Reporting Council (or its successor body) should explicitly include innovation as a measure of effective stewardship.

Dr Christopher Haley, Nesta’s Head of New Technology & Startup Research, said:

“Innovation is a key driver of growth and prosperity, and increasing this is a core part of the UK’s Industrial Strategy. However, to maximise their competitiveness in a post-Brexit world, British firms should look more closely at their own innovation activities.”

“We know that companies, shareholders and policy-makers understand the importance of innovation, yet there appears to be a disconnect between what firms say and the behaviour that they currently reward.”

Sarah Wilson, Chief Executive of Minerva Analytics, said:

“Getting Pay for Performance right is crucial for shareholders, companies, indeed all their stakeholders. Too often compensation has been linked to short-term market metrics rather than real business drivers. Executive pay reform has largely been focussed on the ‘How Much’ rather than the ‘What For’; this research shows it’s time to change the equation.”

David Pitt-Watson, former Chair of Nesta’s Endowment noted.

“Every one of these remuneration packages has been approved by shareholders. That has happened despite the fact that publicly, investment managers declare they want to promote innovation. So do companies and policy makers. If we are serious about creating a finance industry which supports a competitive economy in the long term, reform of these incentives is an obvious place to start.”

Ends

Press contact - Will Hoyles, 07812 362714, [email protected] / [email protected]

Nesta_Press

Press contact - Will Hoyles, 07812 362714, [email protected]

FCLT Global, a 501(c)(3) not-for-profit dedicated to developing practical tools and approaches that encourage long-term behaviors in business and investment decision-making, are also available for comment - Ross Parker, +1 508 667 5451, +1 617 203 6599, [email protected]

The full report, prepared in collaboration with Minerva Analytics, and the authors are available for interview. The report is available to download here - http://www.nesta.org.uk/report/invisible-drag-corporate-incentives

About Nesta

Nesta is an innovation foundation. For us, innovation means turning bold ideas into reality and changing lives for the better. We use our expertise, skills and funding in areas where there are big challenges facing society. We've spent over 20 years working out the best ways to make change happen through research and experimenting, and we've applied that to our work in innovation policy, health, education, government innovation and the creative economy and arts. Nesta is based in the UK and supported by a financial endowment. We work with partners around the globe to bring bold ideas to life to change the world for good.

www.nesta.org.uk

Nesta is a registered charity in England and Wales 1144091 and Scotland SC042833.