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FTSE 350 improves executive pay structure, but needs to ensure reward is linked to performance, says Deloitte


While FTSE 350 companies have taken positive steps to improve their executive remuneration structures, there is still more work to be done by many to achieve best practice and ensure that reward is linked to performance, according to the Executive Directors’ Remuneration report from Deloitte, published this morning.

After a period of two years when many FTSE 350 companies awarded no salary increases to executive directors, most are seeing their salaries rise in 2011. Increases for main board directors in FTSE 100 companies in 2011 are typically between 2.5% to 7.5%, with a median of 4%, and between 0.5% to 5% in FTSE 250 companies, with a median of 3%.

The maximum annual bonus opportunity for FTSE 100 or FTSE 250 executive directors has remained constant at 150% and 100% of salary, respectively. However, bonus payouts have increased during the year from 71% of maximum to 87% of maximum for FTSE 100 companies and from 54% of maximum to 86% of maximum for FTSE 250 companies.

Over the past 10 years, across all companies, median bonus payouts have consistently been around 70% to 80% of the maximum. Long-term incentive opportunity for FTSE 100 companies has remained constant during the year with a slight uptick in the FTSE 250.

But typical payout levels as a proportion of the maximum are lower than those of annual bonus plans and there is no payout from these plans in at least a quarter of companies in most years. Over the past decade, there has been a large increase in the number of companies with deferred bonus plans and with shareholding requirements in place for senior executives.

Some long-term plans are now incorporating further retention periods, but required shareholdings are typically limited to one or two times salary. Shareholdings in the top performing companies are typically much higher than these requirements and the actual shareholdings of most executives, with a median of 11 times salary for the CEO in the top performing FTSE 100 companies and a median of three times salary for the CEO in the top performing FTSE 250 companies.

The Deloitte research identifies two characteristics commonly shared by companies delivering the strongest returns to shareholders: they tend to have a more consistent and longer serving senior team than the general market; and these teams typically have much larger shareholdings.

Stephen Cahill, partner in the remuneration team at Deloitte, said: "While there have been positive changes, such as the trend towards more deferral and retention of shares and the increase in clawback provisions, we are also seeing above target annual bonuses payouts on a regular basis. "Remuneration committees need to remain vigilant and ensure that remuneration is fair and reasonable from a participant's and shareholder's perspective. Reward should be linked effectively to the long-term strategy and success of the company.

"It is not surprising that after a two year period of widespread pay freezes there has been a return to pay increases for executive directors. What has surprised us is the number of salary increases above 5%, which is significantly above inflation and the increase in average employee earnings. Remuneration committees should consider increasing salaries only where there is a real and compelling reason to do so and any increases should be limited to the general level of increase for other employees, unless exceptional circumstances exist.

"Long-term plans tend to be strongly linked to performance and can effectively support the business strategy and deliver shareholder value. "Even in the best designed incentive plans it is important the final payouts under both annual and long-term plans are determined in the context of overall company performance, the current environment and all other relevant factors. Remuneration committees should be more prepared to use judgement when making these decisions, both positive and negative."

"In addition to limiting salaries, remuneration committees should acknowledge that paying target bonus requires genuinely good performance, when setting the annual bonus targets. For bonuses in excess of this amount, truly stretching performance should have been achieved. During the design of long-term incentive plans, performance conditions should be aligned with the strategic vision of the company and shares should be held for long enough to align the interests of shareholders and management."

"The Government is about to release new proposals on remuneration disclosure and we expect it to send a clear message to UK businesses that other ways of controlling remuneration have not been ruled out."

Deloitte's Executive Directors' Remuneration report, to be published later this month, 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 350 companies. The report is based on information from the latest report and accounts of companies in the FTSE 350 as at 1 July 2011, excluding 49 investment trusts. 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 2011.

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 2011. A total of 299 companies are included in the analyses.