Deloitte FTSE 250 report: Shareholders will play pivotal role in reforming executive pay
Business advisory firm publishes highlights from annual FTSE 250 remuneration report
14 November 2016
- FTSE 250 companies faced less opposition from shareholders over executive pay than FTSE 100 companies in 2016.
- Executives at FTSE 250 companies are increasingly tied to the long-term performance of the business.
- Median salary increases are steady at 2%, but increases in performance-based incentives are cause for concern.
FTSE 250 companies faced less opposition from shareholders over executive pay than FTSE 100 companies in 2016, according to Deloitte’s annual FTSE 250 remuneration report. Remuneration arrangements received support from more than 90% of shareholders in 80% of FTSE 250 companies compared with 75% of FTSE 100 companies.
Mitul Shah, partner in Deloitte’s executive remuneration team, said:
“Every year, the vast majority of companies receive very high levels of support in favour of the remuneration report and in the last ten years only a handful of FTSE 250 companies have failed to receive majority support. This suggests institutional investors do not hold material concerns around executive pay in listed companies, or are not using their votes to register concerns.
“The voting behaviour of shareholders is particularly interesting in light of discussions around the reform of executive pay. Ultimately the supervision of executive pay falls to shareholders and therefore the support of institutional investors will be required to effect meaningful change.”
“The Executive Remuneration Working Group has led calls for the relationship between shareholders and companies to be strengthened. It has rightly highlighted the need to rebuild trust between companies and shareholders in order to allow for a greater diversity of pay arrangements, suited to the needs of the company. Equally, shareholders need to step in more frequently to demand change from companies. Overall, a more robust response is required to deal with the ratcheting of pay and where poor performance has been rewarded. This change of approach from shareholders is just as vital as any further regulatory intervention.”
Executives are increasingly tied to long-term performance of business
The report finds that salary increases for executive directors at FTSE 250 companies have been held at a relatively low level of around 2%. Companies are also strengthening the link between executives and long-term company performance, due to pressure from shareholders. For example, the median shareholding requirement for executive directors in FTSE 250 companies has increased this year to 150% of salary from 100% last year, and from 175% to 200% for chief executives. Changes to the UK Corporate Governance Code mean that 90% of FTSE 250 companies now have the ability to recover bonuses or long-term incentives in order to prevent executives being rewarded for poor performance.
“FTSE 250 companies continue to follow the lead of the larger listed companies and over the last few years have made some significant changes to pay policies, which aim to create a better alignment between executives and the interests of shareholders.”
Higher performance-based pay is cause for concern
The median bonus opportunity for FTSE 250 companies has increased to 125% of salary for executive directors and to 150% for chief executive officers. The median long term incentive opportunity for chief executives has also risen, from 150% of salary to 175%. The report suggests that over time variable incentive opportunities for executive directors at smaller FTSE 250 companies have moved towards the median for the index as a whole.
“In many cases it is not appropriate to benchmark against the whole FTSE 250 index and companies should carefully select appropriate comparators for benchmarking exercises. Benchmarking should focus on a market competitive range which is appropriate for the specific company, rather than constantly chasing the median, and should not be seen as a substitute for the remuneration committee exercising its judgement in the specific context of the business.”
Shah also added: “We continue to see bonuses paying out above target year after year. This suggests that target setting decisions may benefit from greater consideration, understanding and rigour. We agree with the Executive Remuneration Working Group and the Investment Association that remuneration committees should be regularly exercising discretion to ensure pay outcomes are a fair reflection of long-term business performance.”
Notes to editors
In this press release references to Deloitte are references to Deloitte LLP, which is among the country's leading professional services firms.
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The information contained in this press release is correct at the time of going to press.
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