2009 UK national average earnings increases (2.5%) outstripped FTSE 100 (1%) and FTSE 250 (0%) base pay increases for the first time in a decade.
PricewaterhouseCoopers’ (PwC) annual report of FTSE remuneration, ‘Executive Compensation – Review of the Year 2009’, shows that FTSE 100 companies have exercised pay moderation in response to the recession. Median increases in base salary for FTSE 100 and FTSE 250 executives fell to 1% and 0%, respectively, in 2009 and were outstripped by the national average earnings base pay increase (2.5%). In 2008, increases were 6% for both the FTSE 100 and FTSE 250 while the national earnings pay increase was also higher at 3.7%.
PwC’s research also found that median maximum bonus potential for chief executive officers (CEOs) remained stable at 150% of salary in the FTSE 100, equivalent to around £1.2m, and 100% in the FTSE 250, which would equate to around £425,000 if paid out in full. But, actual bonus payments decreased by 20% in 2009 reflecting business performance and the economic climate. The median bonus payout for CEOs in the FTSE 100 and FTSE 250, respectively, were £525,000 and £217,000.
The number of executives receiving nil bonuses doubled in the FTSE 100 last year and increased by 40% in the FTSE 250. In practice, this means one in six executive directors in the FTSE 100 and FTSE 250 did not receive a bonus in 2009. This statistic is significantly influenced by banks, which in many cases did not pay bonuses in 2009.
Median total long-term incentive grants values fell slightly at CEO level with the median economic value of awards now at 140% of salary – roughly equivalent to just over £1m. This compares with 150% in 2008. Companies experiencing significant falls in share price have scaled back award levels by anything between 20% and 40% in response to shareholder pressure. The most common plans remain performance share plans, deferred bonus plans and share options.
Notwithstanding this moderation, shareholder opposition to remuneration proposals grew, with 20% of FTSE 100 companies have more than one in five of their shareholders withhold support for the remuneration report, up from 3%in 2008. The majority of contentious AGMs arose outside the banking sector.
Tom Gosling, reward partner, PwC, said: “Remuneration committees must balance the need to motivate executives in the face of a challenging business environment, reduced bonuses and increased taxation against shareholders’ perceptions that the link between pay and performance is not strong enough, and that one year of pay restraint is not sufficient given the severity of the downturn and the impact on profits.
“Some new issues will break waves this year – pension arrangements for top executives and contractual arrangements in areas, such as termination terms, will be the focus for many shareholders in the current AGM round,” he added.
Spill-over from Banking into Wider Sectors
While the stated focus of the UK’s Financial Services Authority (FSA) Code of Practice and 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 will be felt by FTSE-listed companies.
There is already wide-spread use of deferred bonuses in the FTSE 100, which is consistent with the prescriptions set out for the banking sector by the FSA. Some 72% of FTSE 100 companies (46% in FTSE 250) operate a deferred bonus plan, in which executives defer some of their annual cash bonus into shares. Around three-quarters (two-thirds in FTSE 250) of these have a compulsory element to deferral.
Gosling said: “The perceived issues with pay are not as great in other sectors as in the banking sector, but there are lessons to be learned. While deferral of bonuses is already common in quoted companies, issues such as allowance for risk in assessments of performance are not adequately addressed in many companies. With the Combined Code and ABI Guidelines now making clear the responsibility of remuneration committees to factor risk into performance assessments, we see this as a significant area of focus for the coming year.”
The Need for a New Remuneration Model
PwC research over several years has shown that current long-term incentive plan designs frequently fail in their objectives of motivating executives and aligning reward with performance.
Gosling said: “The current interactions between shareholders, remuneration committees and executives regarding plan designs and performance conditions are leaving all parties frustrated. We need to break the mould of traditional thinking in this area and move to a new model if we want executive pay to work more effectively. This means using simpler plans, with a greater role for remuneration committee discretion in making a rounded assessment of performance. Ensuring executives are significant shareholders will often be more successful in achieving alignment than complex long-term incentive plans.”
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