• Number of FTSE executive directors falls by one-fifth in four years;
• Non-executives now outnumber executives on FTSE boards by over 60 per cent;
• Still no room for women on board.

The number of executive directors of FTSE companies has fallen by 20 per cent since 2002, as the ‘Higgs effect’ continues to rapidly change the structure of the UK plc boardroom, according to a report by Deloitte, the business advisory firm.

Executive directors on main boards dropped by 6.5 per cent this year, the fourth successive year of decline, as UK plc respond to the Higgs report by cutting the number of executives faster than they add non-executive directors. The number of non-executive directors remains unchanged from last year, and has only increased by 12 per cent over the last four years

Carol Arrowsmith, head of the remuneration team at Deloitte, said; “FTSE 350 companies are striving to achieve the boardroom equilibrium recommended by Sir Derek Higgs, but not in the way many people expected. By reducing the number of executive directors, companies are striking a better balance between executive and independent board members, and at the same time making the boards less unwieldy.

“The knock on effect is that the demand for non-executive directors is stabilising although fees continue to increase albeit not as fast as last year with the overall median increase being 7.1 per cent this year compared to 10 per cent last year.”

There is still a huge gender imbalance in the boardroom. There has been no increase in the number of female executive board members, and only a one per cent increase in the number of female non-executive directors. Women only make up three per cent of executive directors and 10 per cent of non-executive directors across the FTSE 350.

Salary

Salaries for executive board members are up slightly, following a gradual decline in salary increases over the last five years. The median increase is now 6.8 per cent compared to 6.5 per cent last year.  For a median FTSE 350 executive director on a salary of STG350,000 this translates into an increase of STG23,800.  The increases may have steadied somewhat, but are still significantly ahead of increases in pay for the overall workforce where the increase in the seasonally adjusted average earnings index is 3.9 per cent.

Bonuses

Increases in annual bonus opportunity have also steadied with the median maximum in the FTSE 250 and in the top 30 companies remaining the same as last year at 100 per cent of salary and 150 per cent of salary respectively.  There has been an increase in the FTSE 100 opportunity with a median of 115 per cent of salary compared to 100 per cent last year.

Actual annual bonus payments have risen since last year, particularly in the FTSE 250 where the median payout was 60 per cent of salary compared to 50 per cent of salary last year.  In FTSE 100 companies the median was 75 per cent compared to 71 per cent of salary last year. 

Bill Cohen, partner and remuneration specialist at Deloitte, commented: “While these higher bonus payouts may raise eyebrows, it is important to look at the performance of the FTSE which, over the same period, increased by 18 per cent compared to nine per cent the year before.  However, it is always important to ensure that annual incentive plans support the business strategy and have appropriately stretching targets.”

More companies have stopped granting share options to executives.  Only 28 per cent of FTSE 350 companies regularly grant options to executive directors compared with 79 per cent three years ago.  In most cases traditional share options have been replaced with performance shares  and / or matching shares awarded on the deferral of bonus payments .   There has also been a decrease in the number of companies awarding both share options and performance shares to executives in the same year with 27 per cent of FTSE 100 companies doing this compared to 47 per cent last year and 17 per cent of FTSE 250 companies compared to 21 per cent last year.

Pensions

Executive pensions have been under much scrutiny over the past year.  Companies and investors have been keen to see how market practice for pensions arrangements has been developing post A-Day.  For new appointments, pensions are becoming less complex with more companies offering defined contribution plans or simply a cash allowance which can be paid into a personal pension.  Defined benefit pensions will be offered to new executive directors in only 31 per cent of FTSE 350 companies compared to 35 per cent in 2005. 

For executives with existing defined benefit arrangements who are impacted by A-Day the most common approach appears to be for the individual to opt out of the pension plan and to take a salary allowance instead.  The size of this allowance is a much debated issue and is not yet commonly disclosed, but where it has been disclosed it is likely to be in the region of 20 per cent to 40 per cent of salary.  Full disclosure can be expected next year.

The Association of British Insurers has also drawn attention to pensions this summer in their letter to FTSE 350 remuneration committee chairman where they comment on the impact of pensions in severance arrangements.  Their issue is in cases of early retirements where the full pension is paid and there is no actuarial reduction for the decrease in service accrued.   Companies will need to ensure that their service contracts are not considered to be over generous regarding the pension on early retirement.  However, with the number of defined benefit arrangements decreasing arguably this issue should eventually disappear.

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Notes to editors

About the report:
This report is made up of two volumes. Board structure and non-executive director fees provides a detailed analysis of the structure of boards and the fees paid to non-executive chairmen, deputy chairmen and non-executive directors in FTSE 350 companies. Executive directors’ remuneration includes analysis of basic salary, salary increases, annual bonus payments, details of annual and long-term incentive design, pensions, notice periods and termination payments, other aspects of remuneration policy and analyses of total remuneration.

Both of these volumes are based on information available in the annual reports and accounts of companies in the FTSE 350, as at 30 June 2006, excluding 31 investment trusts (33 in 2005). A total of 319 companies are, therefore, 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, 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 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 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. 

For further information, visit our website at www.deloitte.co.uk.