A report launched by Deloitte, the business advisory firm, on Monday (12/6/06) at the London Stock Exchange’s annual AIM conference suggests that on flotation, the structuring of executive remuneration and reward for AIM companies still favours the use of share options. The report also reveals that the average inherent share option gain for the chief executive of a newly floted AIM company is £500,000, with other executives making £294,000.

The report, Directors’ remuneration at flotation 2006, analyses current market practices based on UK companies joining AIM or the main market during the period January 2005 to January 2006.

James Ferguson, AIM partner at Deloitte, comments:
“Companies floating on AIM are moving away from long term incentive plans for their executives (only 10% this year compared with 14% last year), with 90% introducing some form of share option plan (compared with 86% last year). This contrasts with the market practice of companies already listed where long term incentive plans (where free shares are provided to executives subject to the fulfilment of specified conditions) are increasingly the share plan of choice (particularly amongst larger companies) . 
 
“The increasing use of share options by AIM companies is the result of a number of factors, including the fact that companies coming to AIM are arguably more optimistic about the prospects of share price growth than companies already listed. As a result, share options (which are typically more geared) may appear to be a more attractive option than long terms incentive plans. Other factors also include the potential accounting costs of granting options pre IPO, which may be less of a concern for companies seeking to list on AIM than for established listed companies. In addition, companies coming to AIM typically tend not to want to have performance targets attached to their pre-IPO awards.”

David Tuch, executive remuneration director at Deloitte, comments:
“The report also shows that newly floated companies on both AIM and the main market are moving away from providing the traditional perks of contractual pension arrangements and company cars.  They are leading a trend towards more performance linked reward and a total remuneration approach, with lower pension contributions and potential for higher incentive awards.”

Other key findings of the report include:

• 54% of companies provide directors with contractual pension arrangements and these were typically defined contribution arrangements. This compares with 70% of companies in last year’s study.  The typical pension contribution is 10% of salary;
• Typical maximum award under bonus plans was 50% of salary – in companies with market capitalisation of over £250m this increased to 150%. The highest bonuses were generally found in finance and property companies;
• Companies including a car or car allowance in the benefits package dropped to just 38% from 55% last year;
• The salary for the top full time executive on flotation is typically around 80%-90% of that for the top full time executive in established listed companies with a similar market capitalisation. For other board positions the salaries are broadly at similar levels. 

Commenting on the importance of remuneration strategy in the run-up to flotation, David Tuch said:
“Flotation marks a step change for most companies. There are many opportunities but also many risks. Addressing potential problems ahead of the float may be easier than doing so in the full glare of the listed marketplace.

“No two companies are the same and this will be reflected in remuneration arrangements, however several factors can increase the risk of wrong decisions being made relating to remuneration.  Lack of management experience of the dynamics of remuneration in a more mature company can create difficulty and awareness of current market practice can help inform the process.  The remuneration strategy should be developed in line with the past history of the company and the likely development of the company in the years following the flotation.”

Other risk factors include:

• Non-executives, which make up the remuneration committee, will often have been recruited shortly before the listing occurs and will not have had time to develop a full understanding of the company;
• Development of remuneration policies is often left until late in the flotation process, when the attention of the company is focused on the float itself. This can lead to insufficient regard being given to remuneration;
• Executives having unrealistic expectations of their remuneration packages post listing.

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Ends

Notes to Editors
*In Deloitte’s April 2006 update on Executive directors' remuneration only 4 FTSE 350 companies were identified as having introduced a new share option plan in the period August 2005 to March 2006 as compared to 27 that introduced some form of long term incentive plan.

About the report
The findings in this report have been compiled from the study of the listing documents of UK incorporated companies joining either the London Stock Exchange main market or AIM by way of an initial public offering (IPO) during the period January 2005 to January 2006.

The report focuses on the 84 companies where the market capitalisation at admission was in excess of £25m. Of these, 17 sought admission onto the main market and 67 onto AIM. Investment companies have not been included in this study.

The report examines the remuneration arrangements in place for the 506 directors of these companies at the time of admission. This includes 239 executive directors and 267 non-executive directors (including 56 non-executive chairmen, two deputy chairmen and 205 non-executive directors).

Please contact us if you would like a copy of the report.

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, providing audit, tax, consulting and corporate finance services. Known as an employer of choice for innovative human resources programmes, it is dedicated to helping its clients and its people excel.

Deloitte & Touche LLP is the United Kingdom member firm of Deloitte Touche Tohmatsu (‘DTT’), a Swiss Verein whose member firms are separate and independent legal entities. Neither DTT nor any of its member firms has any liability for each other’s acts or omissions. Services are provided by member firms or their subsidiaries and not by DTT.

Deloitte & Touche LLP is authorised and regulated by the Financial Services Authority.

The information contained in this press release is correct at the time of going to press.