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Hewitt New Bridge Street: FTSE 100 employers remain cautious about executive remuneration


Following two years of widespread salary freezes, most of the UK’s largest companies have maintained caution in executive salaries, a FTSE 100 remuneration survey has found.

Hewitt New Bridge Street, the remuneration consultancy, today published its annual report on executive remuneration for the FTSE 100.

Report on FTSE 100 Directors' Remuneration 2011 highlights that a quarter of FTSE 100 companies have frozen salaries, and where salaries were increased for 2011, this was typically a modest 3%, broadly in line with inflation and workforce salary increases.

The rewards potentially available under variable pay, which typically comprises 60-65% of total reward, have seen similar restraint. The median value of long-term incentive awards in 2010/2011 has remained largely unchanged compared with the previous year, while the maximum bonus potential for FTSE 100 executives also remained stable year-on-year at 180% of salary (for the highest paid director). However, bonus payouts were higher than in the previous year, at around 150% of salary at the median, although the majority of companies (over 70%) include partial deferral of bonus and over a third (35%) of companies now include a provision for bonus clawback.

Rob Burdett, a principal consultant at Hewitt New Bridge Street, said:??"In recent years, FTSE 100 companies have responded to the challenging economic conditions with widespread freezes in annual salary. In addition, and particularly over the past 12 months, we have started to see signs of some permanent shifts in the way that executives are rewarded.

"This can be seen in the moderation of the total reward potentially available, plus the increasing use of more sophisticated mechanisms, such as deferral and clawback, which further allow companies to hold executives accountable for performance.

"While these results are further evidence that the fixed/variable pay structure remains relevant, the challenge for remuneration committees isn't just the total amount paid to executives but rather whether they are rewarding the right things. There is an argument to suggest that the current structure for determining payouts under variable pay is too formulaic.

"Remuneration committees should be able to use some element of discretion - alongside formulaic measurements of performance - to ensure that executive pay reflects all relevant factors - including personal performance - while remaining mindful of the company's overall financial circumstances and the macro-economic conditions."

Base salary comprises up to 30% of total remuneration. Over the past two years, salary freezes have been a common occurrence as companies have reacted to the challenging economic environment.

During 2009, 60% of companies implemented salary freezes for highest paid directors which then dropped to 35% in 2010. In 2011, a quarter of FTSE 100 companies have implemented a pay freeze for highest paid directors. Where salary has increased, it has typically increased by 3%, broadly in line with inflation and workforce remuneration.

The median pay for highest paid directors is £835,000 per annum varying depending on the company's position within the index. For example, FTSE 30 company base salary was typically £1.07 million per annum while for FTSE 31-100 companies the base salary of the highest paid director was £750,000 per annum.

Comprising annual bonus and long-term incentives, variable pay accounts for around 60-65% of a typical FTSE 100 executive director's remuneration package, although this increases to 70% for larger companies, such as those within the FTSE 30. Approximately 60% of variable pay tends to be share-based and relates to long-term performance conditions, such as total shareholder return (TSR), earnings per share (EPS), return on capital employed (ROCE) etc.

While there has been no increase in the maximum annual potential bonus this year (typically 180% of salary), actual bonuses earned by the Highest Paid Director during 2010/2011 were around 150% of salary (versus 120% of salary for the year 2009/2010), or between 80% and 90% of the maximum bonus potential.

But more than 70% of FTSE 100 companies now require part of the bonus to be deferred into shares, typically for three years. In addition, in 2011 over 35% of companies disclose a clawback facility in their annual bonus plan (2010: 15%).??Long-term incentive plans (LTIPs) continue to be the longer-term reward vehicle of choice, operated as the sole long-term incentive by 45% of FTSE 100 companies, and operated in conjunction with another plan by a further 40% of companies.

Burdett added:??"While bonus payouts have increased, we are seeing a greater use of tools such as bonus deferral where typically 50% of the bonus payable is deferred for three years in shares. Clawback is also becoming increasingly popular, giving investors reassurance that in the highly unlikely event that a bonus is paid out on the back of mis-stated results, there are mechanisms in place to require the repayment of that bonus.

"However, shareholders will still tend to require specific justification of how the size of the bonus reflected underlying performance. This is now a key issue."