The country’s top companies are increasingly taking notice of investors’ views when structuring directors’ remuneration packages but there is still room for improvement, according to research conducted by Hewitt New Bridge Street.
Around 60% of those surveyed for The 2009 FTSE 100 directors’ remuneration reports have responded to the downturn by freezing salary levels in the past year, with the median salary of FTSE 100 highest paid directors being £800,000.
Actual bonuses earned in 2008/09 have also reduced to around 90% of salary (or around 65% of the maximum potential). This compares with last year’s figure of around 110% of salary or 80% of the maximum.
There is also evidence that some companies have reflected falls in the share price by reducing share award levels, as a percentage of salary. Of those that disclose their Long Term Incentive Plan (LTIP) policy, around a quarter of the FTSE 100 companies, more than 40% disclosed a policy of lower grant sizes for 2009.
David Tankel, principal consultant at Hewitt New Bridge Street, said: “The arrival of recession in the UK economy has left its mark on the remuneration packages of the directors of its leading companies. With the economy experiencing dramatic change, companies have taken into account investors’ opinions and, of companies that disclosed details of their 2009 salary settlement, almost 60% have adopted a pay freeze. Those that did not attracted significant flak from the investor community.
“On the other hand, while the recession has had its impact on bonus payments, which fell from 2008 levels, bonuses still remained relatively high. While there have been variations, with the figure for companies with a March 2009 year end – and therefore including more of the downturn than companies which reported earlier – standing at 50% of salary rather than the 70% of salary seen at companies with a December year end, overall bonus payments are higher than many would have expected.”
Key survey highlights:
Base Salary
- Around 60% of FTSE 100 companies have frozen salary levels this year.
- The median salary of FTSE 100 highest paid directors is £800,000. The corresponding figures in the FTSE 30 and 31-100 are £1 million and £745,000 respectively.
- The median salary of FTSE 100 finance directors is around £490,000 and for other executive directors is around £465,000.
Balance of Package
- Variable pay (i.e. annual bonus and long-term incentives) accounts for around 60% of a typical FTSE 100 executive director’s remuneration package (compared to only 45% in 2003).
- Approximately 60% of variable pay relates to long-term performance (compared to around 50% in 2003).
- However, FTSE 30 CEOs packages are more geared, having around 70% of their package performance-linked, with 65% of variable pay based on long-term performance.
Annual Bonus
- The median annual bonus potential for highest paid directors is around 175% of salary (although the most common potential remains at 150% of salary). The median potential for finance and other directors remains at 150% of salary.
- Actual bonuses earned in 2008/09 were around 90% of salary (or around 65% of the maximum potential). This compares to around 110% of salary or 80% of the maximum for 2007/08.
- 60% of companies require part of the bonus to be deferred in shares for a period of time (typically three years).
Long-Term Incentives
- The most common approach is the sole operation of a Performance Share Plan (40% of companies). While 30% of the FTSE 30 grant both options and performance shares, only 22% of the FTSE 100 as a whole have a policy of granting options (compared to around 80% in 2003).
- FTSE 100 highest paid directors typically received long-term incentive awards last year with an ‘expected value’ of around 140% of salary, which broadly equates in face value terms to an award of 255% of salary under a Long Term Incentive Plan (LTIP).
- Earnings Per Share and Total Shareholder Return remain the most common measures used in long-term incentive arrangements.
- Over 80% of companies have a formal shareholding guideline. The median level of shareholding required is 200% of salary for the highest paid director and 125% of salary for other executive directors.
Pensions
- While defined benefit (DB) pension plans remain the most common approach for directors, the incidence of these plans is falling. The most common provision offered to newly appointed directors is a defined contribution (DC) pension (45% of new directors). A quarter of new directors receive cash supplements.
- The median contribution to a DC plan is around 22% of salary, while the median cash salary supplement is around 26% of salary.
Total Remuneration
- Target total remuneration for highest paid directors is around £2.5m. For finance directors and other directors it is £1.6 million and £1.5 million respectively.
Service Contracts
- Service contracts containing notice periods of 12 months are now the norm. Less than 10% have notice periods of less than 12 months.
- Around 25% of contracts have liquidated damages clauses. Of these, around half include bonus in the calculation of termination payment.
Non-Executive Directors
- The median non-executive chairman’s fee is around £325,000.
- Typically, fees for other non-executive directors range between £60,000 and £80,000 depending on their role.