‘Pay for performance’ culture evolving In Ireland, Hewitt Associates’ research shows
22nd August 2008
Contacts:
Michael O’Keefe, Pembroke Communications, +353 1 649 6488
Colin Mayes, Hewitt Associates, +44 (0)1372 733 689
Anna Mitchell, Capital MS&L, +44 (0)20 7307 5346
Irish directors’ pay rises by 12%, total remuneration up by over 30%
DUBLIN — Companies listed on the Irish Stock Exchange (ISE) are increasingly motivating their directors by linking a greater portion of their total reward package to company performance, according to research from Hewitt Associates, a global human resources services company. On average 40% of directors’ remuneration is now dependent on business success, aligning reward with investors’ interests. The research, Report on Irish Directors’ Remuneration 2008, also found that directors of companies listed on the ISE reported an average 12% pay rise last year, with total reward up by over 30%, once variable pay elements such as bonuses were included.
Hewitt researched the remuneration packages for directors of all 69 companies listed on the ISE. The companies have a median market capitalisation of €171 million, but ranged from €3 million to €37 billion. Data was provided for the highest paid director (which is typically the CEO, but occasionally the chairman), finance director, other directors (including the board), and other directors (e.g. HR, legal).
The research shows the median fixed salary for the highest paid director was €610,000. When performance-related bonuses and other variable pay elements are included, the total annual reward ranges from a lower quartile of €496,000 to an upper quartile of €2 million reflecting the size of the company. Finance directors’ salaries tend to be around two thirds of their CEO’s salary, while other executive directors’ salaries tend to be slightly lower at 60%, depending on the relative importance of their role, in line with the UK market.
Commenting on the survey Rachael Ingle, director, at Hewitt said:
“Directors’ reward comprises two basic elements: fixed pay and variable pay, which is incentivised and based on performance. Over the past few years, international investors have been increasingly interested in how directors are motivated and rewarded. As a result of this we are seeing an evolving culture of ‘pay for performance’, with companies motivating their directors by bringing their interests more in line with that of their investors. We can now see this trend firmly taking root in companies listed in Ireland, with a significant amount of director’s remuneration linked to business – rather than purely personal – performance. This sends a very positive signal to investors who are interested in the Irish market, as it reflects European and international best practice.”
Better performance measures
Given the increasing link between performance and remuneration the chosen measure of success has come under close scrutiny. The business performance indicator most commonly used to date has been Earnings Per Share (EPS). However, the Hewitt survey shows that many companies are looking to other measures because EPS may not take into account core business objectives.
Rachael lngle said:
“Earnings Per Share is a just one measure of business success and it often does not tell the wider story. For example, is the main objective to increase margins? If so, perhaps improvement in this might be a better basis for measure. The key is choosing an appropriate measure – or combination of measures – which links directly to the core business strategy.”
Better use of incentive plans
40% of Irish directors’ total remuneration is now variable pay, directly linked to the performance of the business as a whole. This portion of the overall package generally includes an annual bonus payable for reaching specific yearly milestones plus a longer term share-linked incentive scheme. Hewitt’s research shows that while 60% of companies listed on the ISE currently use share option plans, there has been a significant shift towards long-term incentive plans (LTIPs); in 2006 2008 nearly 35% of companies used LTIPs compared with only 20% in 2006.
Rachael lngle said:
“Share options still appear to be the most popular choice as part of the total reward package. However, we firmly believe that LTIPs are a much better mechanism for reward. Not only are they more cost effective, but they also offer more value to shareholders concerned about dilution of shares. They also more accurately reflect business performance outside market trends, offering more positive returns for the employee. We expect to see a greater shift towards LTIPs over the next few years.”
If you would like to receive a copy of Report on Irish Directors’ Remuneration 2008, please contact Susan Hanley on +353 (0) 1 4705305 or susan.hanley@hewitt.com
Glossary of terms:
Share options
A right to buy shares at a point in the future at a price set today, normally subject to continued employment and the meeting of performance conditions. They reward growth in share price. Commonly granted under an Executive Share Option Scheme (ESOS).
Long-term incentive plans (LTIPS)
A generic term given to a long term share scheme where executives can earn ‘free’ shares subject to meeting demanding performance conditions. It is different from an Executive Share Option Scheme in that no payment is required to receive the shares. It rewards the full value of a share, not just the growth over the vesting period. This is typically a Performance Share Plan or it might be a Share Matching Plan.
Earnings per share
Equivalent to the Company’s total earnings, divided by the number of shares in issue.
Total Shareholder Return
Used to compare the performance of different companies’ stocks and shares over time. It combines share price appreciation and dividends paid to show the total return to the shareholder.
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; executive remuneration 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.