What’s the Story?

The government aims for 1.5 million homes delivered in five years, a 50% upshift on the last government’s target. A new study of the UK’s top house builders last week looks at base and total pay levels; and the mix and focus of incentive pay.

The study looked in particular at incentive focus, asking if the focus on growth is strong enough.

Should house builders drive for growth, and if so, do their incentives to support that drive? Well …. NO - BOB CAN’T DO THAT says the new study.

Capacity constrains make a step change in growth profile potentially difficult. Reframing house builder’s incentives to focus more on growth asks deep questions about growth delivery. New growth incentives may set unrealistic dysfunctional strategic aims.

The overall average CEO incentive pay profile looks like this:

The profit and growth focus is less than 30% of total incentive money on offer for the average house builder CEO. And far less again as a percent of total pay.

Why Does it Matter?

Competitive pay matters, a lot in fact. You can’t buck the market as Margaret Thatcher said years ago. True then, true now.

In a tight labour market with specialist skills, strong demand will see a rise in price, not an increase in supply. The economic definition is inelastic supply. When demand upticks strongly, with no adjacent supply increase, pay will rise strongly. This is not a greed or lack of governance thing; it’s just the market working.

House builders are important. They serve the fabric of our society and contribute to our quality of life. Not just in the houses we live in, but also the adjacent homes and facades we live with day by day, and for decades to come.

For these companies, a wider opportunity to build is not enough. The capacity to deliver is based on skilled labour and infrastructure issues too, both of which are short term hard to expand. Top talent in the house builder sector can help reshape the capacity profile and move ahead on volume aims, but only over realistic timeframes, and with other interventions and reshaped incentives.

So, the government planning consent bonfire and the industry response to the growth opportunity matters a lot. Not just for house builder shareholders but to us all.

Newspoint view

Strategy and executive incentives should be intertwined. It is too simple to say that incentive design should reflect the strategy once set. Setting strategy in the first place requires deep expert conversations about the risks and rewards of the future business opportunities and challenges.

Setting strategy isolated from thinking on top pay is sub-optimal at best. This is not an academic exercise. If top folk assume the strategy comes first and then a gaming process of incentive metric weighting and targets can unfold later on, that is deeply unhealthy. Yet seen commonly.

Instead, the executive and business future prospects should be debated together. That skin in the game approach is often used in PE (alongside a share investment ask) but is less seen by far in major companies. Instead, it should be normal business practice.

This is true for all companies; the UK house builder example just throws this important issue into the limelight.

Executive Compensation and Incentive Design

Please feel free to email or call:

Damian Carnell - [email protected] +44 (0) 7989 337118

VA Bec Bostock - [email protected]

Please share this CORPGRO information with your board or your colleagues.