The City should undergo a “much needed shift in culture” away from its obsession with short-term rewards, according to a government-backed report.
London School of Economics professor John Kay called for bonuses to be moved into line with long-term goals rather than “short term gains” in the report into the financial sector.
Vince Cable, the business secretary, commissioned the review which called for numerous changes, such as scrapping rules which oblige stock market-listed companies to reveal updates every quarter.
Kay said: “A lack of trust and poorly aligned incentives have helped create a culture of short-termism in our financial markets.
“This is undermining their role of supporting innovative, sustainable long-term business performance.”
The City’s short-term bonus culture has led to a drop in relationships based on trust, the report said. The financial sector should target producing returns for savers and investors, while it should also create “investor forums” to foster closer engagement.
Pressure is mounting on executive pay and a number of rebellions over generous packages have taken place during the so-called shareholder spring.
Cable will now look over the findings of the report, which he has labelled insightful and powerful.
The report’s reforms, if put in place, could lead to fewer trading jobs, it is thought.
More should be done to base remuneration on a business’ long-term performance, the report said, while long-term incentives should be paid in shares that do not vest until after an executive has retired.
Business expert and international speaker Roger Harrop, from RogerHarrop.com, said: “I am fundamentally of the view that bonuses should only reflect the business doing better.
“I do not accept that anyone should get a bonus if the business is not improved by whatever key performance indicator is appropriate.
“There are the bankers and other companies where directors have got bonuses when business has gone down and that is a nonsense.”
Harrop added: “I would say a bonus should ideally be based on three years performance as any more these days is probably ridiculous.
“A public limited company’s shareholder value should have been improved over three years to get a bonus.”
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