Investment brokerage says sales-based pay for luxury goods CEOs is outdated

The performance targets of luxury goods companies' chief executives are too often based on a sales-growth yardstick that has become inappropriate in the current spending downturn, broker Exane BNP Paribas said on Friday.

Sales growth in the sector has slowed to low single-digit percentages for some products, such as leather goods, with more severe declines in other segments, including luxury watches, in a spending downturn exacerbated by a drop in tourist travel because of security concerns.

"We believe that most companies need an overhaul in total compensation logic and criteria, and that many would benefit from better aligning CEO compensation with shareholders' interests," Exane BNP Paribas said in a note.

Instead of sales, Exane BNP Paribas argues that luxury brands should focus on return on invested capital (ROIC), cashflow and total shareholder return, suggesting that such performance criteria became an area of focus when investors picked luxury stocks.

"We view this as an area of opportunity as luxury goods companies will need to work harder to attract investors in this structurally more subdued growth environment," the broker said.