Financial Crisis: Implications for FTSE Executive Remuneration

While the stated focus of the one-off 50% payroll tax levy on bankers’ bonuses is to change behaviour in the banks, the repercussions of this and other prescriptions for remodelling the way executives in the broader financial services sector are remunerated could be felt by FTSE-listed companies, say reward experts at PricewaterhouseCoopers (PwC).

Analysis from PwC’s annual FTSE remuneration report, ‘Executive Compensation: Review of the Year’ (due to be published in January 2010), shows shareholder activism on remuneration this year has not been restricted to financial services. In 2008, just 3% of FTSE-100 companies had more than 20% of shareholders withholding support for the remuneration report – in 2009, this figure climbed to 20% of companies.

Tom Gosling, reward partner, PwC, said: “Although the focus of remuneration reform has so far been on the banking sector, we are already seeing spill-over to other sectors. In particular, the requirements to strengthen governance around pay and make proper allowance for risk in measuring performance will touch all companies. Around one in five large companies had more than 20% of their shareholders withhold support for their remuneration report this year, a dramatic increase in opposition compared to previous years – and most of the controversial cases were outside financial services. The next AGM season will take place during or in the run up to an election so, against a backdrop of continued economic uncertainty and pay caps in the public sector, scrutiny on executive pay arrangements will not diminish.

“There is a danger that incentive pay will become permanently tarnished in the eyes of the public. Against a background of growing frustration among shareholders, non-executive directors and executives themselves with the perceived problems with incentives, there is a need for some fresh thinking, unconstrained by current norms. Incentive plans need to be simpler, and more aligned with business-specific goals. Increasing shareholding requirements for executives may be a better way of generating alignment with shareholders than complex long-term incentives.”

The lessons from the banking crisis are being applied across sectors, with the Governance Code and shareholder guidelines emphasising the need for all companies to take risk into account in remuneration and to ensure sufficient strength to governance processes.

Gosling concluded: “With regulation and legislation encroaching into the area of executive pay, the coming year may represent the last chance for shareholders, regulators, consultants and companies to show that each can play their role in preserving the comply or explain approach to governing pay and avoid the introduction of a draconian rules-based approach. This means listening to the remuneration reform messages we have heard during the banking crisis, and applying the parts that are relevant in a sensible and proportionate way in other sectors.”


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