A new era in executive remuneration?
Deloitte publishes insights from its 2013 report on remuneration in FTSE 100 companies
24 September 2013
"It is clear that companies now understand there is no rationale in normal circumstances for giving salary increases to executives that are higher than those given to other employees." -
Stephen Cahill, partner in the remuneration team at Deloitte
- The median salary increase was 2.5%; a third of companies did not increase salaries;
- The median bonus payout was 67% of maximum bonus opportunity*;
- 62% of companies now require executive directors to hold shares with a value of more than one times their salary compared with 48% last year.
FTSE 100 companies are listening to shareholders and are making changes to remuneration structures to support better shareholder alignment and long term stewardship. This is demonstrated by the fact that shareholders have raised fewer concerns than last year, according to a new report on directors’ remuneration in FTSE 100 companies from Deloitte.
Salary increases continue to be modest with around a third receiving no increase in 2013 and a median increase of 2.5%, the same as last year.
Stephen Cahill, partner in the remuneration team at Deloitte, comments: “It is clear that companies now understand there is no rationale in normal circumstances for giving salary increases to executives that are higher than those given to other employees. It also does not mean that there should be expectations of salary increases being awarded every year.”
Annual bonus payouts in respect of 2012 performance are lower than last year, with median payouts of 67% of maximum bonus opportunity compared with 75% for 2011 and 87% in 2010. The median level of bonus opportunity remains at 150% of salary in FTSE 100 companies.
The trend towards tailoring bonus plans to the company’s business strategy continues. Two thirds of plans now incorporate measures based on the company’s key performance indicators.
Cahill adds: “We believe incentive plans should support the longer term success of the company and not be based solely on short term financial performance. At the same time, it is important to recognise that payouts must reflect the overall financial performance in the year to which the bonus relates.
“Last year we noted that there was still work to be done on changing both bonus targets and expectations. The lower bonus payouts appear to reflect lower earnings per share growth across FTSE 100 companies. Companies have listened to their shareholders and made a move in the right direction by strengthening the link between pay with performance.”
Alignment with shareholders and long term stewardship
The majority of companies are now recognising the need for better shareholder alignment and long term stewardship. A large majority of companies (over 80%) have introduced clawback and malus provisions into their bonus plans and there has been an increase in the number of companies operating bonus deferral arrangements (85%).
A significant number of companies (92%) now have formal shareholding requirements in place and there has been an increase in the number of shares executive directors are expected to hold. The research shows that 62% of companies now require executive directors to hold shares with a value of more than one times salary, compared with 48% last year.
Companies are starting to consider performance periods of more than three years and further retention or holding of shares following vesting. Over a quarter of companies (26%) have incorporated longer timescales into their incentive plans.
Cahill comments: “We think these findings go some way toward explaining why shareholders have generally been more supportive of arrangements this year, compared with 2012. Our experience suggests that many companies, when they anticipated contentious issues, chose to engage with shareholders earlier and more extensively.
“We are starting to see a genuine move towards a stronger alignment between remuneration, company strategy and performance.”
New disclosure requirements
From 2013 shareholders will have a binding vote on the remuneration policy. Companies have never before been in the position of not being able to make payments to directors unless this has previously been agreed with shareholders. The binding nature of the vote means that the policy report could become more focused on the legal ramifications rather than as a way of communicating with shareholders.
Cahill comments: “We are going into unknown territory and remuneration committees need to think hard about what the policy allows them to do and make sure they understand the risks. There will be a temptation to hand over the writing of the policy report to the lawyers but we believe the report should be seen first and foremost as a way of communicating the policy in a way that shareholders will easily be able to understand and evaluate.
“The new regulations may bring about some positive changes but there is a danger that it may encourage companies to adopt a standard approach. This could be at the expense of ensuring that remuneration is tailored to really drive business strategy, which may not necessarily be in shareholders’ interests.”
Notes to editors
*There is a maximum bonus opportunity based on company performance. Depending on the extent to which the performance targets are met a proportion of the bonus will be paid, up the maximum for outstanding/exceptional performance.
In this press release references to Deloitte are references to Deloitte LLP, which is among the country's leading professional services firms.
Deloitte LLP is the United Kingdom member firm of Deloitte Touche Tohmatsu Limited (“DTTL”), a UK private company limited by guarantee, whose member firms are legally separate and independent entities. Please see www.deloitte.co.uk/about for a detailed description of the legal structure of DTTL and its member firms.
The information contained in this press release is correct at the time of going to press.
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