FTSE SmallCap Companies Further Align Executive Pay With Investors' Interests
12th May 2008
Contacts:
Colin Mayes, Hewitt Associates, +44 (0)1372 733 689
Increase in variable pay has investor support, but economic downturn may create tension over performance targets
LONDON, UK — The 2008 annual Report on FTSE SmallCap Directors' Remuneration, from Hewitt New Bridge Street, the UK's leading executive remuneration specialists, highlights a greater alignment of interests with shareholders, as the pay-for-performance component of executive remuneration increases significantly.
Key survey highlights
Total reward
Median total reward opportunity rose 12% year-on-year, double that of the basic salary component
Fixed pay
Average base salary increases of between 5 – 6% p.a.
75% of smaller companies now opt for risk-sharing, Defined Contribution (DC) pension schemes for executive directors
Variable pay
Migration to higher performance related pay component of total reward has been sustained in 2008
Variable pay is now more than 40% of total executive reward package, up 5% on 2007
Long term incentive plans (LTIPs) now constitute 20% of total package
Median bonus potential is 100% of salary, up from 80% in 2007 - in line with FTSE 250
Commenting on the findings, Rob Burdett, a principal consultant at Hewitt New Bridge Street, said:
“Viewed by investors as an increasingly important mechanism to align the interests of executive management and owners, variable pay components of total remuneration for smaller company executives have risen significantly over the course of the year. While the gap is narrowing between SmallCap companies and FTSE 250/100 members in terms of the variable pay opportunity (now 40% of the total package in the SmallCap), they are still out of step with their larger rivals (45% in the 250 and 55% in the 100).
“Within this there is an emerging trend for a longer-term view. While it is true that the annual bonus opportunity has increased, an increasing percentage (45% – 50%) of the executive director's variable pay is now driven by long term incentive plans which typically take a three year view of performance.”
Rob Burdett continued:
“Aligning executive reward to execution will doubtless create an interesting conundrum for companies, should economic conditions continue to worsen. A key challenge for FTSE SmallCap remuneration committees will be how best to take account of a more challenging operating environment. While investors have been supportive of companies increasing executives' variable pay opportunity, will they be happy if actual payouts continue to rise when commercial growth stalls?
“This places the remuneration committee in a difficult position. Recalibrating performance targets completely could be viewed by some investors as moving the goalposts, however, arrangements must be commercial if they are to attract and retain talent incentivised by achievable performance objectives. An open dialogue with investors is the best, and only, way of striking a workable balance.”
The ever growing focus on performance-related pay among smaller companies is further reinforced by the increase in maximum bonus potential which has doubled in five years, rising from an average of 50% of salary in 2003, to 100% of salary in 2007. This is now fully in line with FTSE 250 companies.
The gap between reward observed in the two indices reflects investor expectations that there should be a fairly close relationship between market cap and remuneration levels. Base salary levels remain substantially lower in SmallCap companies (around 30% lower) with the median base salary for the Highest Paid Director at £315,000, compared with the FTSE 250 median of £460,000. This has a significant knock-on effect on total remuneration as other pay elements are leveraged off base salary. Median total remuneration for the Highest Paid Director is £695,000, again much lower than the median FTSE 250 level of over £1.1m.
Like the FTSE 250, SmallCap companies are also moving towards Long Term Incentive Plans (LTIPs) and away from options. Only 35% of FTSE SmallCap companies now have the facility to grant options to senior executive management, compared with 45% in 2007. Nearly 60% of companies operate LTIPs as their sole incentive to reward long term performance, compared with just 15% five years ago.
About Hewitt Associates
For more than 65 years, Hewitt Associates (NYSE: HEW) has provided clients with best-in-class human resources consulting and outsourcing services. Hewitt consults with more than 3,000 large and mid-size companies around the globe to develop and implement HR business strategies covering retirement, financial and health management; compensation and total rewards; and performance, talent and change management. As a market leader in benefits administration, Hewitt delivers health care and retirement programmes to millions of participants and pensioners, on behalf of more than 300 organisations worldwide. In addition, more than 30 clients rely on Hewitt to provide a broader range of human resources business process outsourcing services to nearly a million client employees. Located in 33 countries, Hewitt employs approximately 23,000 associates. For more information, please visit www.hewitt.com.
Contacts:
Claire Maloney, Capital MS&L, +44 (0)20 7307 5341