Special Report
As the economy hits the most significant downward cycle in 50 years Finance Directors need to take stock of their companies remuneration packages and compensation vehicles. We provide insight and offer advice as we look towards a new era in remuneration. >> Back to Remuneration Challenges special report
FTSE 350 remuneration |
|
|
| Written by Addleshaw Goddard | |
| Friday, 21 November 2008 | |
|
Executive Pay – is the party over for the leaders of the countries biggest companies?
We did not expect the AGM season this year to be particularly dramatic for FTSE 350 companies and it has so far only yielded very few, and fairly minor, public skirmishes involving companies and their shareholders. Investors have continued to react against one-off incentives and there has been some concern expressed that the performance targets under a few companies’ incentive plans are not challenging enough.What we have heard most strongly from investors, both in the press and from private ongoing dialogue we have with them, is that upward ratcheting of pay and retention bonuses are the most serious concerns they have overall with particular concern about the escalation of pay unrelated to performance. The interesting question is whether the current economic conditions will put a brake on these trends? Base Salaries Salary increases awarded to FTSE 350 executive directors have been very similar to last year’s increases, remaining conservative from an historical perspective but still at a median rate above both annual inflation (4.2 percent) and general pay increases across the United Kingdom (4.3 percent). Annual Bonus Plans The annual bonus is the incentive over which executives typically have the most immediate influence and impact. In recent years, not only has the annual bonus been an integral component of variable pay but it has also seen a change in emphasis from the short term to the longer term through the use of Deferred Annual Bonus plans (DAB). A DAB involves the deferral of part, or all, of the annual bonus with additional restrictions for a period of time. The typical maximum annual bonus potential for chief executives in the FTSE 100 is around 150 percent, and the typical maximum annual bonus potential in the FTSE 250 is around 100 percent of basic salary. Long-term Incentive Plans Option plans continue to decline in popularity with a significant number of companies stating that they will not be using their current plans to make new grants to executive directors. Of those companies that continue to make use of options, the median maximum grant level remains steady at 200 percent of salary for FTSE 100 companies. Most significant is the growing number of performance share plans (PSPs) with 93 percent of FTSE 100 and 88 percent of FTSE 250 companies operating PSPs. Typical award levels are around one times salary. While Total Shareholder Return (TSR) continues to be the predominant measure for performance share plans and Earnings Per Share (EPS) for share option plans in the FTSE 100, there is a definite trend away from using single measures and an increased willingness to consider other metrics, such as Return on Capital Employed and Net Asset Value. Historically, TSR has been the most commonly used performance condition for performance share plans. TSR is typically measured relative to a comparator group of companies. For FTSE 250 companies the picture is slightly different. A smaller proportion of FTSE 250 plans rely on TSR alone, while EPS is more commonly found. Where another measure is combined with TSR, it is most likely to be EPS. Shareholders expect the remuneration of executive directors to be clearly supportive of business strategy and objectives and there is real evidence that this is starting to happen. Almost a third of long term incentive plans in FTSE 350 companies now incorporate measures of performance other than the more commonly used EPS or TSR measures. These often tend to be business sector specific, for example, plans in real estate companies will often incorporate measures of Net Asset Value. Conclusion Many companies have enjoyed a period of sustained growth and delivering added value to shareholders and it is therefore unsurprising that remuneration for FTSE 350 executive directors has continued to rise. However, it is important that the linkage between performance and reward continues, even when economic conditions are more challenging. This will be a real challenge for Remuneration Committees in the year ahead. |
Digg it! 
del.icio.us 
Newsvine 
Reddit 
Stumble It! 
