The way most big businesses reward their Chief Executives and other senior staff is inhibiting innovation and research and development, and encouraging short-term gains over long-term investment, according to a study of the remuneration packages of FTSE 350 companies released today by Nesta, the global innovation foundation, in collaboration with independent stewardship support service Minerva Analytics.
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:
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.”
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
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.
Nesta is a registered charity in England and Wales 1144091 and Scotland SC042833.