• Executive director roles in large listed UK companies decline dramatically
• M&A activity has added to the squeeze on boardroom opportunities
• Remuneration plans increasingly aligned to business strategy
• Performance measurement moving away from one size fits all approach.

The number of executive directors in FTSE 350 companies has declined for the fifth year running, resulting in 20% less positions than there were five years ago, according to a new report by Deloitte, the business advisory firm. This disappearance of almost 360 roles suggests that the opportunity to become an executive director of a large UK listed company is rapidly declining.

Carol Arrowsmith, head of the remuneration team at Deloitte, said “The decline of the executive director is quite extraordinary and is primarily a result of corporate governance guidelines which require half the board to be independent. This changing shape of the board can be a positive thing, leading to more focussed and high quality debate. However, there is also a danger that as the executive element of the board shrinks, the development of strategy is pushed out of the boardroom and into executive committee meetings leaving non-executive directors with a lack of involvement in key decisions.

“Given that there are fewer executive positions and the fact that the past twelve months has demonstrated that even large companies are no longer immune to being taken over, we might expect senior managers looking for the next challenge to see private equity as an attractive alternative to the plc role. The competition from private equity puts increasing pressure on remuneration committees to ensure remuneration is structured to reward superior performance and to retain and motivate senior executives.”

Shareholders expect the remuneration of executive directors to be clearly supportive of business strategy and objectives and there is real evidence that this is starting to happen. Almost a third of long term incentive plans in FTSE 100 companies and a fifth of those in FTSE 250 companies now incorporate measures of performance other than the more commonly used earnings per share or total shareholder return measures. These tend to be business sector specific. For example, plans in real estate companies will often incorporate measures of net asset value, whereas in insurance companies they may use return on embedded value.

Deloitte’s research reveals a growing number of bespoke, one-off plans being implemented which are intended to support specific business strategies. Some of these arrangements incorporate elements akin to those found in private equity and Deloitte believes that listed companies can learn some lessons from the private equity environment.

Carol Arrowsmith added: “It is important to remember that the two worlds are not directly comparable. The timescales are different and in private equity there can be much greater risks in terms of personal investment and job security. But aspects such as having a clearer definition of success and identifying the real drivers of value, focusing the rewards on those responsible for that success and keeping arrangements simple can certainly help to improve the effectiveness of arrangements in listed companies.”

Salary
Salary increases for executive directors are slightly higher this year than last year. The median increase is now 7.0% compared with 6.8% last year and 6.5% the year before. However, the median increase for the chief executive is lower at 6.4% which may reflect the fact that more of the remuneration for the chief executive is likely to be linked to performance rather than fixed salary. The comparable increase in the seasonally adjusted average earnings index was 3.7% so increases for executive directors are still significantly ahead of those received by the general workforce.

Bonuses and incentives
The median annual bonus opportunity has not changed for the last three years in FTSE 250 companies but continues to increase in FTSE 100 companies from 115% of salary last year to 130% of salary this year. Actual payouts have also increased significantly in FTSE 100 companies with a median payout of 94% of salary this year compared with 75% of salary last year. In FTSE 250 companies the median payout this year was 75% of salary compared with 60% last year.

Sally Cooper, director and remuneration specialist at Deloitte, commented: “Many companies have enjoyed a period of sustained good performance and therefore the level of payout is perhaps unsurprising but it is important that remuneration committees continue to monitor how performance is measured and ensure that the targets remain appropriately stretching. The link between performance and reward must be clear; shareholders will expect to see a corresponding decrease in the payouts if company performance declines.”

Only just over a fifth of FTSE 350 companies now regularly grant options to executive directors compared with around three quarters of companies five years ago. Most executive directors now participate in a performance share plan and will typically receive an award of shares with a value of 150% of salary at the time of award. The vesting of these shares is dependent on corporate performance targets and it would be usual for around a quarter of the shares to vest if minimum targets are met.

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, pensions, 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 2007, excluding 36 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 2007. The analysis of long term incentive plans also includes information from shareholder communications on new plans put forward for approval at AGMs up until early July 2007. A total of 314 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 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.