2009-10-07
|
State of the economy will increase focus on the "Pay for Performance" model in executive remuneration at Europe's top 100 companies, says Hewitt Associates
|
Stockholm, SWEDEN – Hewitt Associates, a global human resources consulting and outsourcing company, says that the current state of the economy means that Europe's top companies will need to review the design of their senior directors' reward packages, particularly cash and share-based incentives. The Hewitt report, 2009 Eurotop 100 Directors' Remuneration highlights the issues of how existing pay structures will need to be reviewed to balance the expectations of top talent with shareholder concerns.
The report demonstrates the surprising degree of similarity on the level of reward received by European directors, showing that top companies are increasingly drawing their leadership from the same talent pool. However, the structure of incentive pay in continental Europe may need to be updated to take account of investor best practice expectations and the new economic reality.
Leonardo Sforza, a principal consultant with Hewitt in Brussels, said:
"While an annual "Say on Pay" vote is still not common practice across Europe (although it has been a reality for UK companies since 2003), we can expect more pressure from both policy makers and shareholders for better disclosure and the greater accountability of Remuneration Committees. Indeed, in Belgium for example, the national code of conduct on executive remuneration has just been revised, and more broadly, the European Commission is updating its five year old recommendation in this area, while new pan-European legislative proposals cannot be discounted for later in the year. But rigorous, fair and fresh reviews of remuneration practices need to go beyond the legalistic approach."
Rob Burdett, principal consultant with Hewitt New Bridge Street in the UK, said:
"Executive remuneration has been the subject of much debate in recent months in the light of greater scrutiny and high profile interest. What is now clear is that many companies are reviewing their executive reward structures to ensure they meet the demands of the current environment.
"While overall pay levels may be similar, the means of structuring packages varies across borders. Share options remain highly prevalent in many parts of Europe, despite the fact that many investors favour performance shares. The current economic climate strengthens the case for a move away from options. Market volatility makes them an over-geared and more expensive incentive than performance shares, as well as having the potential to over-reward executives when markets recover."
Pay-for-performance culture
With the growth of a pay-for-performance culture emerging across senior directors' remuneration at Europe's top 100 companies, the Hewitt report reveals that around three-quarters of total reward is delivered by short- and long-term incentives.
Rob Burdett said:
"It will be interesting to see the level of bonus payouts in the coming year in light of the current recession. With levels of fixed pay unlikely to increase much (if at all) in 2009, the emphasis is firmly thrown onto performance-related pay.
"While some will argue that bonuses are hard to justify in a recessionary environment, we believe it's important that companies maintain incentive arrangements linked to clear objectives. But companies have to remain sensitive to shareholders' views on determining the level of performance that triggers the payment of a bonus. The targets must not encourage undue risk-taking, which can be addressed by bonus deferral and claw-back provisions, both of which remain very uncommon in mainland Europe."
Key findings
Hewitt's research reveals variable pay, including bonuses, typically accounts for more than three quarters of an executive's total remuneration, with the median on-target total compensation for the highest paid directors at each of the Eurotop 100 companies standing at €5.5 million.
Other key highlights include:
- Levels of executive remuneration are broadly similar across the top 100 European companies as they compete internationally for top talent. However, some country-by-country differences in the design of reward plans remain.
- Nordic companies record the lowest level of total compensation, with Swiss companies recording the highest. While this is a reflection of market capitalisation to some extent, it may also reflect a strong cultural emphasis on equality in parts of the Nordic region.
- The proportion of variable pay in total directors' remuneration is highest in the UK and Germany, where it accounts for 77 per cent and 76 per cent respectively.
- Base salary levels appear to be higher among Spanish companies and lowest in France, although French directors benefit from more significant pension arrangements than directors from some other countries.
- Median levels of base salary for the highest paid executive (typically the CEO, but in some cases the chairman) are above those of similar roles in US companies – which place more emphasis on variable pay than their European counterparts.
- Market value options remain very common in all jurisdictions bar Spain and the UK where Long Term Incentive Plans (LTIPs) are the long-term incentive of choice.
Notes to editors
To receive a full copy of the survey, including methodology, please email your request to pierre.ottebratt@hewitt.com
The Report on Eurotop 100 Directors' Remuneration analyses levels of remuneration among the constituents of the FTSE Eurotop 100 Index (based on the constituents as at December 2008 and using accounts published by December 2008). It considers the overall level of remuneration as well as the level and mix of constituent elements.
Details of the constituents of the FTSE Eurotop100 can be found here.
About Hewitt's European Executive Compensation Practice
Hewitt Associates is the world's leading HR consulting and outsourcing firm, operating in over 40 countries with over 24,000 employees. Hewitt's global executive compensation team is one of the largest and most respected.
In Europe, we have over 3,000 employees and offices in 17 countries. We currently employ over 100 dedicated executive compensation consultants in Europe and we advise nearly half of the Eurotop 100 companies. In the UK, trading as Hewitt New Bridge Street, our executive compensation team, advises more companies than any other firm in this area and we have one of the leading US executive compensation teams advising 141 of the Fortune 500 companies.
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 consults with companies to design and implement a wide range of human resources, retirement, investment management, health management, compensation, and talent management strategies. As a leading outsourcing provider, Hewitt administers health care, retirement, payroll, and other HR programmes to millions of employees, their families, and pensioners. With a history of exceptional client service since 1940, Hewitt has offices in 33 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.
