Variable remuneration for top managers may have negative impact on profit

Marthe Van Hove

By Marthe Van Hove

Researcher, Entrepreneurship

Xavier Baeten

By Xavier Baeten

Professor of Reward & Sustainability

02 December 2020

If companies want to boost their short-term profitability, the best way to do it is to grant a high remuneration level and commit strongly to incentives such as bonuses and share-related reward schemes. It is striking, however, that this has a boomerang effect on the company’s longer-term financial performance. As it turns out, high variable pay and a strong emphasis on profitability criteria have a negative impact on company profits.


This is an remarkable finding in the annual survey of top salaries by the Executive Remuneration Research Centre at Vlerick Business School. Professor Xavier Baeten, who conducted the research along with researcher Marthe Van Hove, tells us more: “This year we have used the time series technique, which enables us to analyse causal impacts. That was unusually labour intensive, because we have been monitoring no fewer than 600 companies in 15 European countries for 6 years. A team of 15 people, led by three Vlerick researchers, provided the input for the 3600 observations.”

Those 600 companies are the members of the Stoxx Europe 600, the index that brings together the 600 largest listed companies in Europe. There are 17 Belgian companies in the index, including AB InBev, KBC, Solvay, UCB and Umicore. The median remuneration across all 600 companies is €2,990,000. Belgium scores lower, at €2,625,000. The Netherlands scores slightly higher than Belgium (€2,830,000), but the average size of the companies in the Netherlands is larger. The CEOs of French listed companies receive notably higher pay (€3,520,000), while Sweden is significantly lower at €1,750,000.

As well as the 17 Belgian companies in the Stoxx Europe 600, however, the research also looked into the developments at all listed companies in Belgium over the past five years. Whereas the salaries of CEOs at small and medium-sized listed Belgian companies have remained more or less the same, remuneration at the Bel-20 companies has increased from €1.7 million to €2.4 million. The basic salary has remained more or less stable, but bonuses and long-term incentives have risen sharply.

As for the composition of the pay package, there has been a clear evolution in share-related rewards: stock options are significantly less popular (with the number of companies offering them decreasing from 72% to 47%), whereas ‘performance shares’ (where the final number of shares depends on achieving certain targets), have increased from 25% to 40%. It is also striking that only 5% of Belgian listed companies insist that their CEO retains a minimum number of shares, despite this being recommended in the updated Belgian Corporate Governance Code.

new aspect of this annual study is the impact of the level and composition of the CEO’s salary on the company’s performance. The research shows that the following factors lead to better financial performance for the company: a higher level of remuneration, a higher proportion of variable rewards (bonus and share-related rewards), and a higher weighting for financial performance criteria.

Xavier Baeten continues: “We must emphasise that we are talking about the company’s performance in the following year, in other words short-term performance. However, we also wanted to know whether the trend would continue in the long term, so we looked at the impact two years later, and over a two-year period. The result is very surprising: all the positive effects disappear, and the incentives even end up having the opposite effect.”

In fact, the researchers found out that the level of remuneration has no impact (either positive or negative). They also observed that a high proportion of variable reward has a negative impact on the company’s financial performance. As for KPIs, it turned out that the use of accounting standards (e.g. profitability) has a negative impact. Thus the research clearly demonstrates that if companies are concerned for their long-term health, specifically their financial health, they should not rely too heavily on profitability criteria, and not on variable remuneration either. This is probably caused by the fact that these measures focus too strongly on the short term. However, it is also important to point out that precisely these criteria are the most popular ones at present. For example, 83% of companies use accounting indicators to determine the CEO’s bonus.

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Xavier Baeten

Xavier Baeten

Professor in Reward & Sustainability