Partner Article

Big firms in “right direction” on exec pay

Salaries among executives are lower in 2012 as big firms are beginning to curb pay rises, research from Deloitte suggests.

The firm’s 2012 FTSE 100 Executive Directors’ Remuneration report delves into pay during the 2012 AGM season among FTSE 100 companies.

Median salary increases for executive directors were found to be 2.5%, down from 3% the year before. Bonus payouts were also lower, and incentive packages were found to be subjected to more “non-financial” objectives.

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.”

Deloitte’s research found no increase in the median potential bonus at 150%, and bonus payouts for 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.

Mr Cahill added: “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.”

Elsewhere, the report suggested new disclosure requirements were likely to encourage remuneration committees to revisit remuneration structures, and could consider moving towards longer term goals and simplification of pay models.

The research follows a turbulent year of investor rebellion, and what Deloitte refers to as the “shareholder spring”, was not a universal protest movement, as only two companies failing to get 50% of the votes in favour.

Mr Cahill also said: “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.”

Leon Deakin, an Associate at leading law firm Thomas Eggar, commented: “Deloitte’s findings surely have to be seen as a step, albeit a small one, in the right direction towards ensuring that pay is linked to performance.

“However, I suspect it will not be enough to placate Vince Cable or, more importantly, the continuing tidal wave of anger directed at the perceived ‘city fat cats’ from those working in the public sector. Or people working at one of the many private companies where any sort of pay rise is a once in a blue moon occurrence, especially when the figures also show the lower increase is still well above average and the median bonus is 120% of salary. Nice work if you can get it!

“Indeed, although larger companies are clearly taking steps designed to reward long term and sustained success (for example, claw back and longer measurement periods) I would be very surprised if Vince Cable felt he had seen enough to change his mind and give ‘self-regulation’ another go. Accordingly, I think we can fully expect to still see him ploughing ahead with his plans to give shareholders greater powers on pay and creating more transparency. In this respect the changes made so far and resulting reductions are definitely too little and almost certainly too late.”

This was posted in Bdaily's Members' News section by Tom Keighley .