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A move in the right direction for executive remuneration?

Deloitte publishes insights from its 2012 FTSE 100 Executive Directors’ Remuneration report

21 September 2012

  • Salary increases are lower in 2012;
  • Bonus payouts for periods ending in 2011/12 were lower than those in the previous period;
  • Nearly half of chief executives and a quarter of directors hold company shares with a value of at least five times salary.

With the spotlight firmly on remuneration during the 2012 AGM season, FTSE 100 companies have continued to improve the structure of executive compensation although there is no room for complacency, according to Deloitte, the business advisory firm.

Stephen Cahill, partner in the remuneration team at Deloitte, says: “Remuneration committees have continued to take a cautious approach to executive pay with overall packages remaining broadly flat compared to the previous year. We are encouraged by lower salary increases and bonus payouts. This suggests that remuneration committees are taking steps to ensure that the compensation paid to executives is fair and reasonable and linked to the long-term strategy and success of the business.

“We continue to see companies introducing and increasing the extent to which bonus is invested in shares and deferred for a number of years. There is also a greater focus on the retention of shares and a doubling of the number of companies with clawback arrangements in place (61% of companies compared with 36% last year), should the bonus turn out not to have been properly earned.”

Salary
The median salary increase in 2012 for FTSE 100 company directors is around 2.5%, but one-third will not receive any increase this year compared with 20% last year, according to the latest report on directors’ remuneration from Deloitte.

Cahill comments: “We believe that the starting point for any committee is to consider whether salaries should increase at all and where increases are awarded they should be limited to those given to other employees, although there are clearly situations where higher increases may be appropriate.”

Annual incentives
Companies are linking performance more closely to the business strategy than basing bonus payouts purely on short term financial achievements. Almost three-quarters of companies base the payout on more than three factors and there has been a significant increase in the use of non-financial measures and those related to very specific business objectives.

Cahill adds: “It is encouraging that the payment of bonuses is being linked more strongly and more transparently, to the key performance indicators of the business. However, remuneration committees should always be mindful of the overall financial performance of the company. They may want to consider either including financial hurdles to be overcome before any bonus can be earned or being prepared to exercise discretion to ensure that any payout is reasonable in light of overall financial performance.”

Deloitte’s research found that there has been no increase in the median potential bonus that may be earned, remaining at 150% and bonus payouts for periods ending in 2011/12 were lower than those in the previous period.

However, as a percentage of salary, bonuses paid in the last financial period were still higher than in any other year, except last year.

Cahill adds: “This is the part of the package where there is still work to be done. Any payout in excess of half the maximum should be the result of better than ‘good’ performance and this will, in many cases, require a change in expectations and targets.”

Changes to remuneration structures
In the past year there has been very little appetite for major changes to remuneration structures generally and particularly to long term incentive plans. However, the new disclosure requirements which will require companies to put remuneration policies to a binding vote in 2014 are likely to encourage remuneration committees to take a fresh look at current arrangements and to consider whether these remain appropriate.

This could include considering a move towards longer term time horizons and the simplification of pay models, replacing more complex share plans with long term share awards and a requirement to hold shares until retirement.

Cahill adds: “This may be a too simplistic solution to a complex problem but remuneration committees would be wise to give some thought as to whether three years is sufficiently long term.

“We are seeing more companies introducing further retention requirements at the end of the performance period together with a continued increase in deferral, with four out of five companies now operating some sort of bonus deferral.”

Shareholding
There has been an increase in shareholding requirements and the level of shareholding generally among FTSE 100 directors. The majority of directors (58%) now hold company shares with a value of at least 200% of salary. In addition, around one quarter of directors (23%) and almost half the chief executives (43%), hold shares with a value in excess of 500% of salary.

Cahill says: “The actual share ownership of senior executives provides strong alignment between the wealth of executives and the experience of shareholders. This is entirely appropriate. However there are still a significant number of companies where bonuses are paid out entirely in cash and where there are no formal shareholding requirements. A relatively large proportion of companies with shareholding requirements only require shares to be held with a value of one times salary. We expect this to be an area of focus for committees over the coming year.”

Shareholder Spring
Deloitte’s research suggests that the ‘Shareholder Spring’ was not a universal protest movement with only two companies failing to get 50% of the votes in favour. It is clear that shareholders have been more vocal and prepared to mount a strong challenge where they feel remuneration is not consistent with how the shares have performed.

Cahill comments: “Given the changes to remuneration disclosure and the introduction of a binding vote on remuneration policy, which comes into effect in 2013, we can safely assume this issue is going to remain at the top of shareholders’ agendas for the foreseeable future.

“Our experience of the past year suggests that remuneration committees are moving in the right direction and we believe this will continue as we move into 2013.”

Ends

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, pension, notice periods and termination payments and other aspects of remuneration policy in FTSE 100 companies.

The report is based on information from the latest report and accounts of companies in the FTSE 100 as at 1 July 2012. 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 2012. The analysis of long-term plans also includes information from shareholder communication on new plans put forward for approval at AGMs up until early July 2012. One company has been excluded as there was insufficient information disclosed in the remuneration report resulting in a total of 99 companies included in the analyses.

About Deloitte
In this press release references to Deloitte are references to Deloitte LLP, which is among the country's leading professional services firms.

Deloitte LLP is the United Kingdom member firm of Deloitte Touche Tohmatsu Limited (“DTTL”), a UK private company limited by guarantee, whose member firms are legally separate and independent entities. Please see www.deloitte.co.uk/about for a detailed description of the legal structure of DTTL and its member firms.

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

Member of Deloitte Touche Tohmatsu Limited.

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