A new study published today by Deloitte, the business advisory firm, reveals that executive remuneration packages at FTSE 350 companies are becoming ever more dominated by performance based elements of pay, and the performance measures used are increasingly aligned to a company’s business strategy.

• The proportion of executive pay linked to performance continues to increase;
• Only 38% of FTSE 350 companies rely on simple share price growth measures as the primary driver of performance related reward;
• Companies are introducing tailored economic measures to assess director performance;
  Research reveals major sector differences in extent to which performance is linked to pay, and the way it is assessed.

The report, Measuring Up, on performance measurement in executive remuneration shows that, even in an average year, incentives account for around half of total pay, often rising to around 80% for significant outperformance.  Encouraged by investor institutions, there is evidence that companies are seeking bespoke solutions to performance measurement.

Although total shareholder return (TSR) remains the most common form of performance measure, there is an increasing trend towards using a combination of TSR, Earnings Per Share (EPS), and other tailored measures, such as return on capital employed and economic spread.

Andrew Page, a director in the Deloitte remuneration practice, said: “Shareholder views are having a major impact. An increasing proportion of executive pay is now performance-related and companies are applying more stringent and bespoke performance measures, not just linking it to total shareholder return (TSR). We are also seeing much greater transparency with around 85% of FTSE 350 companies disclosing details of the performance measures used in executive incentive plans.”

Banks and financial services companies have the largest proportion of performance linked remuneration, and offer the highest potential annual bonuses.  However, the actual bonuses paid in these companies, as a percentage of the maximum were the lowest, with over a quarter of financial services companies paying no bonus to their executive directors.

At the other end of the scale, utility companies, transportation and business services, retail and real estate companies have the lowest proportion of performance linked pay.

Banks, financial services and real estate companies tend to have a package weighted towards the short term, whereas companies with longer term business cycles such as oil & gas and chemical companies tend to weight packages towards the long term.

Across the FTSE 350, annual bonuses have doubled in the last three years.  The research findings indicate that typically 75% of the bonus payment is based on financial performance during the year, with profit being the primary driver of awards.

However, many plans will include specific business measures. Health and safety measures are common in mining & metals and oil & gas companies; customer service is a key measure in utility companies; a high proportion of media companies use revenue; industrial goods and services companies tend to use cash flow; and real estate companies include net asset value as a measure.

There is an increasing trend across the board towards performance share plans, with packages more likely to be weighted towards the longer term in the largest companies. Of the new long term plans introduced since August 2005, 75% were performance share plans; 83% of FTSE and 70% of FTSE 250 now participate in these plans.

In terms of how companies have actually performed, the research shows that smaller companies have typically outperformed the larger companies in terms of relative shareholder return.  There have also been significant differences between sectors, for example, the median returns to shareholders over the last three years in the oil & gas sector have been 30% compared to 14% in the retail sector.

This supports the use of business specific comparator groups for assessing a company’s performance, rather than comparing performance against a broad index.

“Remuneration committees are focused on ensuring that pay for performance means what it says, and that incentives for executives are in line with measures which match the specific objectives of the business and provide the most effective link to value creation,” concluded Andrew Page.

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Notes to editors
About the report

This report provides detailed analysis of short term and long term incentive practice for executive directors, current market practice and recent developments in the selection of performance measures used in executive incentives and historic industry sector performance against a number of ‘real’ performance measures, in FTSE 350 companies.

The report provides an insight into the performance related elements of an executive director’s remuneration package. It provides a focused look at the balance of fixed and variable pay, the levels of payout available and achieved under incentive plans and the choice of performance measures which underpin these plans. It also provides an analysis of short and long term industry sector performance for four measures used in executive incentives plans: the popular total shareholder return and earnings per share measures, and the less common return on capital employed and economic spread measures.

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.