The Changing Face of Senior Executive Remuneration
22nd June 2007
Senior executive pay continues to make the headlines in 2007. Hardly a day goes by without the publication of a new pay survey indicating that Directors’ remuneration has increased, or a press report about some pay controversy.
Although median salary rises still outstrip general wage inflation, our experience is that the rate of increase is generally slowing and that a growing number of companies are awarding Directors similar percentage increases as the workforce as a whole. But, given the increases in performance pay potential, some argue that any above-inflation rises are now inappropriate.
Annual bonus potential continues to increase as have actual bonus payments, partly due to the increased maximum and partly due to healthy company performance. This is an area of significant investor concern, and we expect to see pressure for more detailed disclosure of bonus structure, so investors can judge whether bonus payments are fully warranted. We also believe that bonus plans will become more sophisticated, using a variety of metrics and that Remuneration Committees will look more closely at bonus vesting schedules to ensure that bonus payments are appropriate in all circumstances. It will also be interesting to see whether the latest ABI guideline, asking for repayment of bonuses if profits are restated, will take off.
During 2006, companies continued to switch out of Option Plans and into LTIPs and now only a minority of FTSE 350 companies grant options. The key debate will continue to be around the setting of meaningful performance criteria. The perceived problems with relative Total Shareholder Return as an incentive have been well aired but we believe it will continue to be used as a way of aligning executive reward with company performance in a significant proportion of cases, though increasingly alongside other metrics.
The challenges of setting robust three-year performance criteria have led some commentators to suggest that annual bonus, with an element deferred, is a better way of incentivising executives. While this may be desirable in some industries and at lower executive levels, we believe that this is a ‘counsel of despair’ and that, in most circumstances, long-term incentives will continue to play a substantial role in senior executive pay.
Many people have looked at remuneration structures in private equity-backed companies and considered if a more highly geared package, with lower fixed pay and a bigger emphasis on equity linked to absolute investor returns, is more appropriate than the more balanced package typically favoured by PLCs. However, despite the introduction of a few private equity-style plans, notably by Cable & Wireless, PLC and private equity remuneration policies continue to differ markedly, perhaps reflecting the different perspectives of the owners and the lack of a clear ‘exit’ goal in PLCs. It will be interesting to see in the coming years whether more of a consensus can emerge.
In the USA, the shift away from share options has continued but, unlike in the UK, options are still used as part of the long-term incentive package by the great majority. Other elements tend to comprise performance shares or units, and pure restricted stock which tends to be used sparingly in the UK. Shareholders have become more vocal, particularly about large severance and change in control payments, and companies are now facing the prospect of a mandatory vote on executive pay. While large differences still remain, the possibility of greater convergence between UK and US packages has implications for global companies seeking to reward their executives in the US within the context of a coherent overall policy.
This half-day seminar will discuss how companies are coping with these and other issues.
Amongst the topics covered are:
- The latest trends in senior executive pay.
- Investor hot topics, with a review of the current AGM season.
- Key developments in executive incentives – is it time to break with the norm?
- An owner’s perspective – private equity vs shareholder in a listed PLC.