The findings reveal a two-year salary freeze for many executives, after over two thirds were awarded no pay increase in 2009. Increases, where given, are likely to be around 3%, which is much lower than the level of increase seen in prior years.
There is more volatility in bonus payouts, which are higher than last year in FTSE 100 companies and lower in FTSE 250 companies. One in seven FTSE 250 companies paid no bonus to executive directors for the 2008/09 period and the median bonus was around 60% of salary, almost 10% lower than the previous year. In contrast, bonuses were paid in almost all FTSE 100 companies and payments have returned to more normal levels, following a year in which they were generally slightly lower.
The median bonus payment was around 100% of salary and in the top 30 companies was 140% of salary, almost 20% higher than last year.
Although actual bonuses earned in the larger companies have increased, this does not necessarily result in more cash in the hands of the executives. In two thirds of FTSE 100 and half of FTSE 250 companies there is a requirement for a significant amount of the bonus, typically between a third and one half, to be deferred, usually into shares and for up to three years.
There is also a growing trend for the deferral to be subject to forfeiture in circumstances of a material misstatement of the company’s accounts or gross misconduct on the behalf of an individual. In a few cases, the ‘claw back’ may be applied if the bonus awarded was later deemed unjustified, or if performance over the deferred period was not satisfactory.
The rise of bonus deferral and claw backs along with the significant shareholding requirements now in place in the majority of FTSE 350 companies suggests that remuneration arrangements for many executives are becoming longer term in nature. The typical executive holds shares in the company with a current value of 150% of salary, with the CEO typically owning twice this amount. Based on the share price three years ago, these shareholdings have lost almost a third in value.
Stephen Cahill, partner in the remuneration team at Deloitte, said: "Last year we saw a very large number of companies freezing executive salaries but at the time it was difficult to predict whether this was a one-off. Now it appears that the years of executive salaries increasing at rates far in excess of inflation and the increase in average earnings are, at least for the moment, well and truly over.
"Companies are now recognising that increases for executives must be considered fair and reasonable in the context of current business circumstances and the pay and conditions for employees more generally.
"Remuneration committees were setting targets in the expectation that conditions in 2009 would be extremely difficult. However, in some cases recovery was swifter than anticipated. These results perhaps highlight the very real challenges faced by committees, in both FTSE 100 and 250 companies, in determining the appropriate degree of stretch in the targets."
Bill Cohen, a fellow partner in the remuneration team at Deloitte, added: "It may be time for a debate on a fresh approach to the way bonuses are paid by taking a less formulaic approach and using more discretion in the determination of the final payout. This would allow committees to take into account changes in circumstances over the course of the year and to look at performance in a more holistic way. This culture shift would require committees to be comfortable in making difficult decisions and all interested parties to have confidence in those decisions. But this might be a way of developing stronger links between pay and performance."
"While we are seeing companies introducing clawback provisions, in many cases these are actually no more than might be considered ‘good housekeeping’. Relatively few companies have introduced provisions which could be considered to have real bite."
