More Carrot, More Stick
27th September 2007
Performance is key to bigger FTSE 100 executive packages, annual survey shows
Variable pay now accounts for more than half of a typical executive director’s package; the tenure is less certain; the link to annual performance is stronger and long-term performance criteria have become much more demanding. These are some of the main findings in the 2007 FTSE 100 Executive Directors’ Remuneration Survey, an authoritative annual survey published this week by New Bridge Street Consultants.
The survey shows that overall, fixed levels of pay (ie. base salary and pension) have remained largely unchanged from last year. However, total remuneration has risen slightly since last year to a median figure of around £2.5 million. Also, variable pay now accounts for over 55% of a typical executive director’s remuneration package, compared to only 45% in 2003. Around 60% of this variable pay relates to long-term performance – up from around 50% four years ago.
At the same time, the rules for tenure are changing. In 2001, a third of all executive directors had a notice period in excess of 12 months. This year, that figure has dropped to just 2%.
“Senior figures in British business command significant sums of money, but increasingly they are being held to account,” said Rob Burdett, a Partner of New Bridge Street Consultants. “The principle of risk and reward has grown in the boardroom, just as it has in the City more generally.
“The changes we are seeing are being driven to some extent by shareholders,” he added. “They want to see remuneration tied more closely to business performance. One way of doing this is by operating Long-Term Incentive Plans, or LTIPs, with tougher performance conditions. LTIPs, which are also more efficient than options in accounting terms, are in place in almost two-thirds of the FTSE 100 now. Shareholders are watching service contracts more closely, and much more focus is being placed on the structure of compensation payments. The rewards are great, but the City expects bang for the bucks.”
“Some changes are also being driven by the private equity market,” he continued. “The model for private equity is based on one-off awards linked to the absolute value of the business on exit. A few PLCs are finding this model quite attractive – particularly where there is a specific goal, such as a recovery. That said, most PLCs still follow the more tried and tested route of annual awards with a mix of relative and absolute targets.”
Key findings of the survey include:
- The median total remuneration of FTSE 100 Most Senior Directors is around £2.5m (£2.4m last year);
- Rates of base salary have slowed from a high of around 14% for executive directors in 2001 to around 6% to 8% in 2006;
- Overall, fixed levels of pay (ie. base salary and pension) have remained largely unchanged from last year;
- Variable pay now accounts for over 55% of a typical executive director’s remuneration package, compared to only 45% in 2003;
- Around 60% of variable pay relates to long-term performance – up from around 50% in 2003;
- A US CEO is paid about 40% more than his UK counterpart, but UK finance directors are generally paid more than their US peers, although the fall in the dollar has influenced this comparison.
- Packages for non-executive roles have risen. .The 2003 median fee was around two thirds of what it is now. Median packages for non-executive chairmen and senior non-executive directors are £303,000 and £76,000 respectively.
Rob Burdett concluded, “Incentive pay must be demonstrably aligned with company goals and performance – especially now so much more is at stake. Annual bonuses are mostly set around budget or market expectations, and both in terms of potential and actual payments, they have risen substantially. While these payments can perhaps be justified in terms of improved company performance, it will be interesting to see what happens if or when that performance begins to decline. Will institutional investors then continue to push for this approach? We’ll have to see.”
For a copy of the full report, or for additional information, please contact Robert Fenner or Tony Lederer at Grayling on 020 7255 1100 or email tony.lederer@uk.grayling.com