More than half of FTSE 350 companies will not increase the salaries of executive directors in 2010, resulting in a two-year pay freeze for many executives.
According to the Executive directors’ remuneration report by business advisory firm Deloitte, two-thirds of executives were not awarded a pay rise in 2009. Salary increases, where given, were likely to be around 3%, which is much lower than the level of increase seen in previous years.
However, there is more volatility in bonus payouts, which are higher than last year in FTSE 100 companies and lower in FTSE 250 companies. One in seven FTSE 250 companies paid no bonus to executive directors for the 2008/09 period and the median bonus was around 60% of salary, almost 10% lower than the previous year.
In contrast, bonuses were paid in almost all FTSE 100 companies and payments have returned to more ‘normal’ levels, following a year in which they were generally slightly lower. The median bonus payment was around 100% of salary and in the top 30 companies was 140% of salary, almost 20% higher than last year.
Stephen Cahill, partner in the remuneration team at Deloitte, said: “Last year, we saw a very large number of companies freezing executive salaries but, at the time, it was difficult to predict whether this was a one-off. Now it appears the years of executive salaries increasing at rates far in excess of inflation and the increase in average earnings are, at least for the moment, well and truly over.
“Companies are now recognising increases for executives must be considered fair and reasonable in the context of current business circumstances and pay and conditions for employees more generally.”
“Remuneration committees were setting targets in the expectation conditions in 2009 would be extremely difficult. However, in some cases recovery was swifter than anticipated. †hese results perhaps highlight the very real challenges faced by committees, in both FTSE 100 and 250 companies, in determining the appropriate degree of stretch in the targets.”
Although actual bonuses earned in larger companies have increased, this does not necessarily result in more cash in the hands of the executives. In two thirds of FTSE 100 and half of FTSE 250 companies there is a requirement for a significant amount of the bonus, typically between a third and one half, to be deferred, usually into shares for up to three years.
Furthermore, there is a growing trend for the deferral to be subject to forfeiture in circumstances of a material mis-statement of the company’s accounts or gross misconduct on the behalf of an individual. In a few cases, the clawback may be applied if the bonus awarded was later deemed unjustified, or if performance over the deferred period was not satisfactory.
Bill Cohen, a partner in the remuneration team at Deloitte, said: “While we are seeing companies introducing clawback provisions, in many cases, these are actually no more than might be considered ‘good housekeeping’. Relatively few companies have introduced provisions which could be considered to have real bite.”
The rise of bonus deferral and clawbacks along with the significant shareholding requirements now in place in the majority of FTSE 350 companies suggests remuneration arrangements for many executives are becoming longer term in nature.
The typical executive holds shares in the company with a current value of 150% of salary, with the chief executive officer typically owning twice this amount. Based on the share price three years ago, these shareholdings have lost almost a third in value.
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