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Directors' remuneration in smaller companies

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Background

Our third report on directors’ remuneration in smaller companies has recently been published. Smaller companies are defined as those companies with a market capitalisation of more than £100m which are listed on the London Stock Exchange main market or on the Alternative Investment Market (AIM) but which are not constituents of the FTSE 350 index. This group therefore consists of most of the constituents of the FTSE SmallCap index and AIM companies with a market capitalisation of greater than £100m.

To provide context and comparison, we have also included analyses of FTSE 250 companies (excluding investment trusts) where this is relevant.

The 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. It also includes analyses of the structure of the board and board committees and the fees paid to non-executive chairmen, deputy chairmen and non-executive directors.
We have included information from the latest report and accounts of companies with a market capitalisation of greater than £100 million (excluding investment trusts), as at 1 December 2008. The data is taken from annual reports and accounts published before this date which includes companies with financial year ends up to and including 31 July 2008, although not all companies with financial year ends of May, June and July 2008 had published their reports in time for this analysis.

We have also included information from shareholder communications on new plans in FTSE SmallCap and FTSE 250 companies, put forward for approval at AGMs up until December 2008. This information is not readily available for AIM companies.

Key findings

Salary increases for executive directors have typically been higher in the FTSE SmallCap companies than in the FTSE 250 companies. The trend continues this year but the median increase of 7%, compared with a median increase of 5.6% in FTSE 250 companies, is higher than last year which is the opposite of the trend we are seeing in the larger companies. However, it is unlikely that this trend will continue; our recent experiences suggest that many companies are considering awarding zero increases to executives in the coming year. An analysis of the most recently published reports and accounts also indicates that where salaries for the coming year are disclosed, over two thirds of companies are awarding no increase to the executive directors.

In AIM companies salary increases have been significantly higher than in other companies and, although this is perhaps harder to predict, it seems unlikely that this will continue at the same rate.

The median potential annual bonus that may be earned has increased from 75% to 100% of salary in FTSE SmallCap companies and in AIM companies, which is now the same as in the FTSE 250 companies. However, the actual level of bonus paid in the most recent financial period has not changed significantly and tends to be lower than in larger companies. It seems likely that bonus payments for current financial periods will be below target and may be close to zero in many companies.

Fewer new long term plans were introduced in 2008 compared with 2007 but the use of performance share plans continue to increase in FTSE SmallCap companies with a corresponding decrease in the use of option plans, at least for executive directors. In AIM companies the share option plan is still the most common form of long term incentive plan. In FTSE SmallCap companies both the potential maximum award and the actual awards made in the most recent financial period are at similar levels to last year.

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NB: This report is not available to professional services firms and individuals. Corporate applications only.

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