2009-08-17
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Research highlights effects of recession on executive pay
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LONDON, UK – The 2009 FTSE 100 Directors' Remuneration report by Hewitt New Bridge Street, the UK's leading executive remuneration specialists, shows how the country's top companies have reacted to the changing economic environment. While it is clear they have taken increasing notice of investors' views when structuring directors' remuneration packages, the report also demonstrates that there may still be room for improvement.
The Hewitt New Bridge Street report shows that around 60% of companies have responded to the downturn by freezing salary levels in the past year, with the median salary of FTSE 100 highest paid directors being £800,000. Actual bonuses earned in 2008/09 have also reduced to around 90% of salary (or around 65% of the maximum potential). This compares with last year's figure of around 110% of salary or 80% of the maximum.
There is also evidence that some companies have reflected falls in the share price by reducing share award levels, as a percentage of salary. Of those that disclose their Long Term Incentive Plan (LTIP) policy - only around a quarter of the FTSE 100 - over 40% disclosed a policy of lower grant sizes for 2009.
David Tankel, principal consultant at Hewitt New Bridge Street, said:
"The arrival of recession in the UK economy has left its mark on the remuneration packages of the directors of its leading companies. With the economy experiencing dramatic change, companies have taken into account investors' opinions and, of companies that disclosed details of their 2009 salary settlement, almost 60% have adopted a pay freeze. Those that did not attracted significant flak from the investor community.
"On the other hand, while the recession has had its impact on bonus payments, which fell from 2008 levels, bonuses still remained relatively high. While there have been variations, with the figure for companies with a March 2009 year end – and therefore including more of the downturn than companies which reported earlier – standing at 50% of salary rather than the 70% of salary seen at companies with a December year end, overall bonus payments are higher than many would have expected."
Although bonus payments were lower than in recent years, companies have continued to pay over half of the maximum potential amount during a period when nearly all FTSE 100 companies saw their share price fall and when most companies' profits had been impacted by the recession. This has inevitably raised the question of whether bonus schemes are still linking pay and performance appropriately.
David Tankel said:
"Our experience has been that for 2009 many companies have been adopting a tougher payment schedule relative to budget than in prior years to reflect the fact that the budgeted number may be lower than in prior years, with a higher "start to earn" point and a tougher stretch target above budget at which point the bonus pays out in full.
"One more hidden aspect of the past year, is the recession's effects on directors' personal worth, in that executives are often typically large shareholders and they have therefore been significantly hit by falls in share prices. We estimate that the median fall in value of shareholding for a FTSE 100 highest paid director was over £600,000 during the year to 1 April 2009."
Into 2010
Executive pay issues are likely to remain problematic into 2010, with the possibility that many companies may post financial results for 2009 which are worse than for the past year – a situation which would increase the focus on the link between pay and performance.
David Tankel said:
"While we don't necessarily expect to see a repeat of the salary freeze seen this year, we do anticipate that executive salary increases for 2010 are unlikely to exceed inflation and/or workforce pay settlements.
"Issues around bonus payments are more difficult to predict. If this year's trend of above target bonuses continues despite what is forecast as lower year-on-year financial figures, then we would expect investors to question bonus structures and demand significantly enhanced disclosure on bonus targets. Companies that are seen as paying bonuses that bear little reflection to the company's performance may well find themselves in very hot water."
David Tankel continued:
"In our view, the 'pay for performance' model with its balance of fixed and variable pay and short- and long-term incentives, using a blend of targets and incorporating a significant equity element, remains the best approach.
"However, the current model must be operated properly - and seen to be working properly. For this to happen there must be a clear link between rewards delivered and the company's underlying performance. As ever, this means choosing metrics that fully reflect a company's particular circumstances."
Key Survey Highlights
Base Salary
- Around 60% of FTSE 100 companies have frozen salary levels this year.
- The median salary of FTSE 100 highest paid directors is £800,000. The corresponding figures in the FTSE 30 and 31-100 are £1 million and £745,000 respectively.
- The median salary of FTSE 100 finance directors is around £490,000 and for other executive directors is around £465,000.
Balance of Package
- Variable pay (i.e. annual bonus and long-term incentives) accounts for around 60% of a typical FTSE 100 executive director's remuneration package (compared to only 45% in 2003).
- Approximately 60% of variable pay relates to long-term performance (compared to around 50% in 2003).
- However, FTSE 30 CEOs packages are more geared, having around 70% of their package performance-linked, with 65% of variable pay based on long-term performance.
Annual Bonus
- The median annual bonus potential for highest paid directors is around 175% of salary (although the most common potential remains at 150% of salary). The median potential for finance and other directors remains at 150% of salary.
- Actual bonuses earned in 2008/09 were around 90% of salary (or around 65% of the maximum potential). This compares to around 110% of salary or 80% of the maximum for 2007/08.
- 60% of companies require part of the bonus to be deferred in shares for a period of time (typically three years).
Long-Term Incentives
- The most common approach is the sole operation of a Performance Share Plan (40% of companies). While 30% of the FTSE 30 grant both options and performance shares, only 22% of the FTSE 100 as a whole have a policy of granting options (compared to around 80% in 2003).
- FTSE 100 highest paid directors typically received long-term incentive awards last year with an 'expected value' of around 140% of salary, which broadly equates in face value terms to an award of 255% of salary under a Long Term Incentive Plan (LTIP).
- Earnings Per Share and Total Shareholder Return remain the most common measures used in long-term incentive arrangements.
- Over 80% of companies have a formal shareholding guideline. The median level of shareholding required is 200% of salary for the highest paid director and 125% of salary for other executive directors.
Pensions
- While defined benefit (DB) pension plans remain the most common approach for directors, the incidence of these plans is falling. The most common provision offered to newly appointed directors is a defined contribution (DC) pension (45% of new directors). A quarter of new directors receive cash supplements.
- The median contribution to a DC plan is around 22% of salary, while the median cash salary supplement is around 26% of salary.
Total Remuneration
- Target total remuneration for highest paid directors is around £2.5m. For finance directors and other directors it is £1.6 million and £1.5 million respectively.
Service Contracts
- Service contracts containing notice periods of 12 months are now the norm. Less than 10% have notice periods of less than 12 months.
- Around 25% of contracts have liquidated damages clauses. Of these, around half include bonus in the calculation of termination payment.
Non-Executive Directors
- The median non-executive chairman's fee is around £325,000.
- Typically, fees for other non-executive directors range between £60,000 and £80,000 depending on their role.
Methodology
The FTSE 100 has been 'struck' as at 30 June 2009. The median market capitalisation of the Index as a whole is £4.3bn. The FTSE 30 has a median market capitalisation of £22bn and the FTSE 31-100 of £3.3bn.
The Executive Director data has been sourced from public disclosures in Report & Accounts and circulars and includes all March 2009 year ends. Data has been provided for the:
- Highest Paid Director - either the Chief Executive or the full-time Executive Chairman;
- Finance Directors; and
- 'Other Directors' - i.e. other main board Executive Directors, excluding Chief Executives, Executive Chairmen and Finance Directors. These 'Other Directors' have been split between 'Functional' roles (e.g. HR, Legal) and 'Operational' roles (e.g. Heads of Divisions).
Data on Executive Committee roles has been taken from our participatory 'Executive Total Reward Survey'.
Target total remuneration has been calculated on an 'expected value' basis. By this, we mean that a value has been attributed to each element of an executive's package. Table [ ] sets out the assumptions used to calculate total remuneration. Only executives who have been in post throughout the relevant financial year have been included.
Calculating Target Total Remuneration
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Salary |
Reported data either current salary or salary paid in the prior year. No ageing factor has been applied due to general salary freezes. |
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Benefits |
Reported cash value. |
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Pension |
Defined contribution plans or cash supplements – company contribution as a percentage of aged salary.
Defined benefit plans – an annual value has been calculated using actuarial assumptions based on each individual's accrual rate, retirement age, pension increase post-retirement and employee contribution (assuming an average age of 50). |
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On-target bonus |
On-target bonus as a percentage of aged salary, if disclosed.
If not disclosed (as is the case in around 55% of companies), then we have assumed an on-target bonus of 50% of the maximum bonus potential.
If neither the on-target nor maximum is disclosed (the case in only 5% of companies), then we have used the actual bonus paid last year as a percentage of salary. |
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Expected value of long-term incentives (EV of LTIs) |
Based on the company's grant policy, if disclosed (as it is in around 25% of cases) or the actual awards of options and LTIPs made last year as a percentage of aged salary.
We have then applied an expected value – for options 20% of the face value, for free share awards with performance conditions (i.e. LTIPs) 55% and for free share awards without performance conditions 100%. |
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Total remuneration |
Salary + benefits + pension + on-target bonus + expected value of long-term incentives. |
About Hewitt New Bridge Street
Hewitt New Bridge Street is the UK's leading executive remuneration consultancy that is the named adviser in the Director's Remuneration Reports of 35 FTSE 100 and 90 FTSE 250 companies. We have a single focus — to assist companies design and implement executive remuneration practices which will help them meet their business objectives.
About Hewitt Associates
Hewitt Associates (NYSE: HEW) provides leading organisations around the world with expert human resources consulting and outsourcing solutions to help them anticipate and solve their most complex benefits, talent, and related financial challenges. Hewitt works with companies to design, implement, communicate, and administer a wide range of human resources, retirement, investment management, health care, compensation, and talent management strategies. With a history of exceptional client service since 1940, Hewitt has offices in more than 30 countries and employs approximately 23,000 associates who are helping make the world a better place to work. For more information, please visit www.hewitt.com
Other Contacts
Anna Mitchell at Capital MS&L on 020 7307 5346 or anna.mitchell@capitalmsl.com
Supriya Mathur, Capital MS&L, on 020 7307 5347 or supriya.mathur@capitalmsl.com
