In a report launched today, ‘Directors’ remuneration on flotation’, Deloitte finds that newly floated companies are leading the trend towards performance linked reward and a total remuneration approach. The report is based on UK companies joining the London Stock Exchange or AIM during the period July 2003 and January 2005.

Stephen Woodhouse, executive compensation partner at Deloitte, comments:
“Deloitte’s report finds a high level of compliance with the Combined Code and the establishment of board committees by newly floated companies, even though for AIM listed companies this is not a requirement. Newly floated companies have lower pension contributions and the potential for higher incentive awards, and as a result of which are leading the trend towards more performance linked reward and a total remuneration approach. Newly floated companies can be used as an indicator of trends for the future, and this report suggests that remuneration planning by FTSE companies of tomorrow will be based on a model of best practice set by these companies.”

“At the time of flotation a business has an opportunity for growth and development and the scope to recruit more top talent. The development of a suitable reward structure is an essential tool in cementing both the existing team and newly recruited talent. However remuneration plans, particularly the performance driven elements, will have to be put together not just by reference to the expectations and reaction of participants, but also by the outside investors.”

Key findings of the report include:

• 70% of companies provide directors with contractual pension arrangements and these are usually defined contribution arrangements. The typical pension contribution is 10% of salary. This is significantly less generous than in the FTSE generally. In this respect, newly floated companies are leading the trend towards more performance linked reward and a total remuneration approach, with lower pension contribution and potential for higher incentive awards.
• Directors are eligible to participate in annual bonus plans in 75% of companies compared to 60% of companies in 2001. This increases with the market capitalisation of the company.
• 24% of companies had granted options to non-executive directors at flotation compared to 55% of the non executive directors included in our research four years ago.
• In newly floated companies the most common notice period is 12 months, both for the top full time executive, and for others directors. This is a significantly different picture to four years ago when it was more common for directors to have a longer initial fixed period. This reflects changes in corporate governance over this period, and is a result of sustained pressure over time from institutional shareholders for a maximum one year notice period for senior executives in order to try and avoid the payment for failure syndrome.
• At the time of flotation the chairman was non-executive in 82% of companies, executive in 14% of companies and there was a combined chairman/ CEO role in 4% of companies. This has changed significantly compared with 4 years ago, when two thirds of the chairmen of newly floated companies were executives. Again this reflects the significant changes in corporate governance guidance over this period, including the Higgs report.
• Board directors in a newly floated company tend to be slightly younger than directors of established FTSE 350 companies. Interestingly, only 2% of executive directors and 3% of non-executive directors are women, compared with 3% and 8% respectively at FTSE 350 companies.

Deloitte warns that remuneration planning should not be overlooked in the run-up to flotation, at what is a particularly sensitive time for a business. A continued focus on corporate governance in relation to pay and performance has increased the responsibilities of remuneration committees, which businesses in the process of floating will be unaware of. Companies may be unprepared for the level of scrutiny that will now be given to the remuneration of their directors.

“Investors look for stability and continuity in the senior management team during the period up to and after flotation. The reward package can undoubtedly help to create loyalty and commitment during this period of change. The structure of the compensation, if designed to align the interests of individuals and shareholders and encourage outstanding performance, will inspire confidence in potential investors,” concludes Woodhouse.

Several factors increase the risk of decisions relating to remuneration being made which subsequently need to be unwound when it is recognised that they do not support the business strategy in a quoted environment. These include:

• Lack of management experience of the dynamics of remuneration in a more mature company
• Executives having unrealistic expectations of their remuneration packages post listing
• 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 on achieving flotation, so that insufficient regard is given to remuneration.

Ends

Notes to Editors

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 July 2003 to January 2005.

The report focuses on the 71 companies where the market capitalisation at admission was in excess of £30m. Of these, 22 sought admission onto the Stock Exchange and 49 onto AIM. Investment companies have not been included in this study.

The report examines the remuneration arrangements in place for the 453 directors of these companies at the time of admission. This includes 215 executive directors and 238 non executive directors (including 57 non-executive chairmen, two deputy chairmen and 179 non-executive directors).

About Deloitte
In this press release references to Deloitte are references to Deloitte & Touche LLP.

Deloitte & Touche LLP is the UK's fastest growing major professional services firm based in 21 UK locations, with over 10,000 staff nationwide and fee income of £1,246 million in 2003/2004. It is a member firm of Deloitte Touche Tohmatsu, a leading professional services organisation, delivering world class audit, tax, consulting and corporate finance services, with around 120,000 people in over 140 countries. Deloitte Touche Tohmatsu is a Swiss Verein, and each of its national practices is a separate and independent legal entity.

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.