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Management

Companies move to non-financial measures for executive pay

Wednesday, 08 August 2007

The number of top UK companies offering annual bonus plans to executives on purely financial measures has fallen by half over the past year, from 33% in 2005/6 to 17% in 2006/07. At the same time there has been dramatic growth in the number of such reward packages offered on a combination of financial, non-financial and individual measures (13% in 2005/06 to 31% in 2006/07). The trend is away from hard financial targets exclusively to include broader corporate activities such as levels of customer satisfaction, employee engagement and environmental measures

The average maximum bonus opportunities available for chief executives in the FTSE 100 companies has risen to 123% of their salary from 103% last year, says the Annual and Long-term Incentives guide published this week by PricewaterhouseCoopers LLP Monks pay data services. At the same time chief executives in FTSE 250 companies have seen a smaller rise of 5% in the average maximum bonus opportunities to 100%, from 95% last year.

While incentive opportunities have increased, so have requirements to retain a minimum shareholding in the company, the aim of which is to maintain an alignment between management and shareholder interests.

Duncan Brown of PricewaterhouseCoopers LLP said: “We are seeing a continuing shift towards variable pay in UK plcs and a growing emphasis on long-term performance when determining executive pay."

“Additionally, the broader corporate stakeholder and corporate responsibility agenda has stimulated growth in the use of non-financial measures in bonus plans alongside those more traditional measures focused on financial and shareholder return. Some of the most popular new measures are operational performance and customer-related ones, which mean that if customer service levels fall then so could executive bonuses.”

The main findings of the 2007 Annual and Long-term Incentives report are:

Annual bonus
The number of posts eligible for an annual bonus in parent companies and divisions and subsidiaries, as last year, is over 90% at all levels. In all parent companies the maximum bonus opportunity ranges from 20% at the median for a lower management position to 100% for a chief executive. In divisions and subsidiaries the figures vary from 20% to 50%

The actual bonus percentages received by chief executives this year have increased from 78% to 91% in FTSE 100 and from 60% to 80% in FTSE 250. In FTSE 250 this is a 33% increase compared with a 17% increase in FTSE 100. For other board directors the increase percentages are from 66% to 78% in FTSE 100 and from 56% to 77% in FTSE 250.

Long-term plans
The most common combination of long-term plans, in which board directors participate, is a deferred annual bonus, share option scheme and a performance share plan. Some 28% of chief executives and 29% of other directors take part in this combination. Below board level participation in just a deferred annual bonus and a performance share plan is more usual in around a quarter of posts apart from at the lowest management level where, in line with market practice, 39% of posts do not have a long-term incentive plan but do participate in an annual bonus scheme.

Share option plans
Although 76% of chief executives in all parent companies are eligible to participate in a share option scheme, due to a decrease in the use of this type of long-term plan, only 37% actually received a grant. However, 89% of chief executives received a performance share plan award. Below board level grants received in a share option plan varied from 80% to 95% according to level and in divisions and subsidiaries the percentages ranged from 86% at the lowest management level to 95% for managing director. In FTSE 100 companies, the percentage of grants awarded in all posts has declined from 89% in 2004 to 33% in 2007.

Performance share plans
The maximum level of award in a performance share plan for board directors in FTSE 100 companies has increased at the median from 150% last year to 200% this year. In FTSE 250 companies the median maximum award level has remained the same at 100%. In other listed companies the median maximum award is also 100%. The actual level of award has increased in FTSE 100 companies from 124% at the median to 147% for chief executives and from 105% to 129% for other board directors. The actual level has remained the same at 100% in FTSE 250 companies for all directors and in other listed companies the award level is 88% and 75% for chief executives and other board directors respectively.

Shareholding requirement
60% of FTSE 100 companies and 40% of FTSE 250 companies have a compulsory shareholding requirement for board directors. The percentages last year were 52% of FTSE 100 companies and 17% of FTSE 250 companies. Many companies (44% FTSE 100 and 77% FTSE 250) require the level of shareholding to be from 51% of basic salary to 100% with 77% FTSE 100 companies and 70% of FTSE 250 companies expecting the level to be reached in five years.