• Salary rises slow as economic slowdown starts to hit executive pay;
• FTSE 350 companies willing to pay premium for business superstars;
• Top 30 UK companies are in a league of their own when it comes to remuneration.

Salary increases for FTSE 350 executive directors have slowed compared to last year according to a new report by Deloitte, the business advisory firm. The median increase is now 6.2% compared with 7.0% 12 months ago. However, companies are increasingly willing to pay for the business superstars in order to safeguard a strong management team.

Carol Arrowsmith, partner and head of the remuneration team at Deloitte, commented: “Executive salary increases during 2007 were still around 2% higher than increases in RPI and average earnings but we are starting to see the impact of a tougher economic climate on salary increases.”

Deloitte’s analysis shows that the gap between the potential remuneration of the chief executive and the rest of the board is increasing. The chief executive in one in three FTSE 100 companies and one in five FTSE 250 companies now has a higher annual and long term incentive opportunity than other board members.

Carol Arrowsmith continued: “One can think of many examples, particularly in the sporting world, of individuals with exceptional talent who can command a high premium. Previous economic downturns have demonstrated that there are talented leaders who can genuinely change the fortunes of businesses and we expect that 2008/09 will see companies focusing on finding, and retaining, those individuals.

“A number of companies have introduced one-off bespoke remuneration arrangements, designed to achieve specific business objectives or in some cases aimed at retaining highly sought after individuals.

“These kinds of bespoke arrangements or special payments will be subject to close scrutiny by shareholders and it is important that the reasons for these arrangements are very carefully communicated. But, where the rationale is clear, shareholders are likely to be supportive of arrangements.  They will, after all, want to attract and retain individuals who can deliver shareholder value and out-perform in the current environment."

Deloitte has also found that remuneration in the very largest UK companies is moving away from the rest of the FTSE 100 companies. The typical salary of a chief executive of a top 30 company is well over £1 million, compared with a typical salary of £750,000 in a FTSE 100 company outside the top 30. Executive directors in the top 30 companies also have potential incentives worth a further 4 x salary compared with an incentive potential of 2.75 x salary in other FTSE 100 companies.

Carol Arrowsmith commented: “When companies are competing on an international playing field, remuneration arrangements must reflect that international dimension. Having said that, it does suggest the need for caution on the part of both remuneration committees and advisers when looking at suitable comparator groups for benchmarking purposes.

“Over the past year we have seen salaries continue to increase ahead of inflation, increases in both annual and long term incentive opportunity as well as higher payouts. But it is possible that we have now reached the high water mark and that the world of executive remuneration may begin to change.

“For many companies, meeting performance targets set two or three years ago is going to be much harder than anticipated and there may be tension as the gap widens between the expectations of shareholders and executives. Shareholders expect executives to feel pain when times are tougher. But executives may feel that a long term incentive plan that does not pay out for more than one or two years is broken. Remuneration committees may need to do some soul searching to ensure that the aims of the incentive plan remain clear, that performance measures continue to support a business strategy which, as market pressures grow, may be in a state of change and that performance targets remain realistic but stretching.”

One in four FTSE 100 and one in five FTSE 250 companies increased the size of the annual bonus in the past year while one in five FTSE 100 companies and one in ten FTSE 250 companies increased the size of the long term share award.

“Award levels have been increasing over a number of years but it is important, particularly in this climate, that there is a good reason to increase the award and it raises the pressure on remuneration committees to ensure that the performance targets are robust,” added Carol Arrowsmith.

The median potential annual bonus is now 150% of salary in FTSE 100 companies and 185% of salary in the top 30 UK companies, but remains at 100% of salary in FTSE 250 companies. The amount actually earned has also increased. In the most recent financial period, the bonus payout was typically around 70% to 80% of the maximum possible. Over three quarters of plans paid out in excess of the target level and only around 6% of executive directors received no annual bonus payout in the period.

Sally Cooper, associate partner and remuneration specialist at Deloitte, commented: “The increase in annual bonus payouts is somewhat surprising given that the bonus potential is now so much bigger although it is true to say that, for many companies, payments in the most recent financial period may not have been affected to any great extent by the recent economic downturn. Shareholders will be looking very carefully at the levels of payout in the coming year and will expect to see a very strong link between payout and performance.”

In larger companies long term share opportunities also continue to get bigger. In five years the median opportunity has increased from 100% to 165% of salary in FTSE 100 companies and from 125% to 255% of salary in the top 30 UK companies although it remains at 100% of salary in FTSE 250 companies. But the payouts have been more variable. Of awards made in 2003 and 2004, around 30% in FTSE 100 and 20% in FTSE 250 companies lapsed completely; the median payout was around 70% of the total award in FTSE 250 companies and around 60% in FTSE 100 companies. In the top 30 companies the median payout from awards made in 2004 was 50% of the total award.

“The research suggests that performance targets may be tougher in larger companies resulting in lower payouts than in smaller companies. It is also clear that payouts under long term plans are much more variable than annual bonuses, suggesting long term awards may be much better correlated to performance. Far fewer individuals receive the maximum award and a significant number will receive nothing,” concluded Sally Cooper.

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Notes to editors:

About the report
Deloitte’s Executive directors’ remuneration report provides detailed analyses of basic salary, salary increases, annual bonus payments, details of annual and long term incentive design, pension, notice periods and termination payments and other aspects of remuneration policy in FTSE 350 companies.

The report is based on information from the latest report and accounts of companies in the FTSE 350 as at 30 June 2008, excluding 43 investment trusts. The data is taken from annual reports and accounts published before this date which includes companies with financial year ends up to and including 28 February 2008. The analysis of long term plans also includes information from shareholder communication on new plans put forward for approval at AGMs up until early July 2008. A total of 307 companies are included in the analyses.

About Deloitte
In this press release references to Deloitte are references to Deloitte & Touche LLP, which is among the country's leading professional services firms. Deloitte & Touche LLP is the United Kingdom member firm of Deloitte Touche Tohmatsu (‘DTT’), a Swiss Verein, whose member firms are legally separate and independent entities.  Please see www.deloitte.co.uk\about for a detailed description of the legal structure of DTT and its member firms. The information contained in this press release is correct at the time of going to press. For more information, please visit www.deloitte.co.uk.