Performance measures, benchmarks and targets in executive remuneration contracts of UK firms

This paper is a descriptive analysis of performance measures, benchmarks and targets in remuneration contracts for a sample of 1269 plans from 440 UK firms for 2002/2003. Data were collected from the remuneration reports that became a mandatory disclosure following the Directors’ Remuneration Report Regulations (2002). The descriptive analysis is divided into two main sections. In the first section, performance measures and benchmarks employed are examined. Consistent with earlier analyses of performance measures (Conyon et al., 2000; Conyon & Murphy, 2000; Pass, Robinson, & Ward, 2000), earnings per share (eps) and total shareholder return (TSR) are the two most popular measures, with share option plans often employing the former and LTIPS the latter. However, it is also possible to observe a shift in the popularity of LTIPs over share options since 2002. When investigating the choice of performance measures used in plans, there is evidence that suggests underlying volatility in the performance measure can affect its being chosen, but this is overridden by instances of mimicry and institutional isomorphism (Di Maggio & Powell, 1983). The second section provides a descriptive analysis of targets set in a sub-sample of plans that employ eps as a performance measure. Here, targets tended to cluster around levels that have been prescribed in guidelines, which again suggests that a certain degree of isomorphism is present. Also, plans tend to have targets lower than past and forecasted performance, and targets set were met six times out of ten. The use of lower and upper threshold targets helps control attainability, but less than half of plans specify an upper threshold target. Observations suggest that the remuneration setting process falls victim to institutional isomorphism in the absence of clear and concrete guidelines regarding what is considered acceptable.