Executive salaries and bonuses – time to take stock

Monday, January 10, 2011 | Posted by: Fiona Cullinan
Categories: Governance, Thought Leadership | Tags: governance, economy, talent, incentives, remuneration, salaries, performance, salary, bonuses, share options, pay, executive, reward, shareholders, incentivise, results

FTSE 100 director bonuses fell by 30% last year but have jumped 22% this year. Basic salaries and share incentives are also up. Are the good times back? Damon Syson reviews the lie of the land for executive salaries.

When it comes to executive remuneration, the key word over the past 20 years has been ‘performance’. While the recession may have prompted widespread shareholder animosity to hefty pay packages, the overall picture shows Britain’s business leaders being handsomely rewarded – but only when their company has performed exceptionally well.

“There is nothing wrong with rewards being given for genuine hard work and success,” says Matthew Fell, Director of Competitive Markets for the CBI. “But it’s important for companies to set the right terms of employment from the outset, to avoid being tied into paying a bonus whatever the performance. No one likes seeing rewards for failure. The best way to allay people’s concerns is to strengthen the link between incentives and long-term performance.”

Stats show the good times are back
Generally speaking, the good times would appear to be back for those at the helm of high-performing companies. According to research by pay experts Incomes Data Services (IDS), in the six months to January 2010, bonuses for FTSE 100 directors rose by around 22%, from an average £456,418 to £558,918 – a dramatic recovery from last year, when their bonuses fell by an average of 30%.

“After a period of relative austerity, boardroom bonuses have been recovering at a much faster pace than anticipated,” says Steve Tatton, editor of the IDS’s Executive Compensation Review.

The dotcom bubble revisited
“The picture is similar to what happened in the early Noughties in response to the dotcom bubble bursting: a lot of long-term incentives didn’t pay out, so remuneration committees started to say, “Look, our directors aren’t incentivised enough. We need to restructure.” Targets have therefore been recalibrated to make them easier in the light of difficult conditions. Which means now, with the first signs of economic recovery, bonuses are starting to pay out again.”

And the most recent figures, published in the Sunday Telegraph’s Pay Report, show that FTSE 100 CEOs have enjoyed a pay and bonus increase for the first time since the start of the recession. They were paid a basic salary of £751,459 on average in 2009-10, an increase of 5% on the previous 12 months.

The research, conducted by RTF Navigator (which tracks the pay levels of FTSE 350 companies), includes analysis of businesses that reported in April as well as for the whole of last year.

Rise of share incentives
Most notably, share incentives grew significantly by 61% year on year, indicating that companies are increasingly using share options to link remuneration to long-term performance.

The pay package of 2009’s top earner, Bart Becht, is a perfect example. The boss of Reckitt Benckiser, the company behind Cillit Bang, Finish and Air Wick, received £92.6 million, mostly in the form of share incentives that had built up over a decade, thanks to the household goods company consistently delivering excellent returns for shareholders under Becht’s leadership.

Big results… big reward.

Remuneration committees – are they getting it right?
Peter Newhouse, an independent consultant on pay and founder of RTF Navigator, believes the important lessons have been learnt.

“If you go back 15 years,” he says, “the concern was that people were getting share incentive awards for lacklustre performance. I think that problem has been solved because of the new style of long-term incentive plans.

“The next concern was that people who were dismissed got huge compensation payments because they had three-year rolling contracts. That’s been solved because no one has a three-year rolling contract any more. So there are fewer instances where people really do get paid for failure because good corporate governance has squeezed it out of the equation.”

‘Reassuringly expensive’ or simply overpriced
Nonetheless, the past year has seen widespread anger over pay levels, with shareholders voting against the remuneration reports of a wide range of companies, and a significant number of CEOs choosing to waive their bonuses.

Shareholders have always been prepared to accept pay growth in tandem with strong profits growth. But the credit crunch has raised questions about whether their executives are ‘reassuringly expensive’ or simply overpriced.

“The vast majority of shareholders have always been willing to support genuine pay for performance and genuine attempts to link it to strategy,” says Marc Jobling, Assistant Director, Investment Affairs at the Association of British Insurers (ABI). “Where people have been angry is where the company has failed to communicate that message.”

Three points for remuneration committees
Marc Jobling advises remuneration committees to keep three points in mind:

1. Restraint. We’re not fully in recovery mode yet and there’s got to be a bit of pain-sharing across the board.
2. Sensitivity. It’s not the ABI’s job to comment on social policy. However, business doesn’t operate in a vacuum and you’ve got to show sensitivity to the wider prevailing economic conditions.
3. Diligence. Are you paying the right amount? That means not too much, but not too little – because we don’t want you to lose good people. Have you considered what effects these metrics you’re introducing will have on the executive’s behaviour? And finally, are you absolutely sure these are the right people to deliver your strategy?

Looking to the future
So what does the future hold for executive remuneration?

“I think it’s going to start going up on its merry way again,” says Steve Tatton of the IDS’s Executive Compensation Review. “If you’re setting targets that are easy to meet in a recessionary period, as the economy recovers and profits start to pick up, you could end up over-rewarding.”

Peter Newhouse of RTF Navigator, meanwhile, believes the biggest challenge for today’s top-level executives isn’t merely securing a favourable pay package, but choosing to work for a company that’s going to be successful.

“Incentives will be increasingly based on long-term performance,” he says. “There’s going to be more deferral, more emphasis on long-term value creation, and an ever-widening gulf between the best and the worst. If your company does well, you’ll make a lot for money. But if it doesn’t, you won’t.”

• If you want to know more about corporate governance and other boardroom issues, contact your local Grant Thornton office or read more on our Corporate Governance page. 

Image: © Artemuestra. Words: Damon Syson. This article originally appeared in Elevate magazine, Winter 2010 issue, which is available as a free download.

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