FTSE 100 respond to shareholder concerns on exec pay

FTSE 100 directors' pay and bonus rates fell last year as companies responded to shareholder pressure and started to develop executive remuneration structures which are more closely linked to company strategy and performance.

The trend, highlighted in a report produced by Deloitte, shows that around a third of directors of FTSE 100 companies received no salary increase in 2013, and the median increase for the remainder was 2.5%, the same as the previous year.

Stephen Cahill, partner in the remuneration team at Deloitte, said: '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 were also lower, with a median rate of 67% of maximum bonus opportunity compared with 75% for 2011 and 87% in 2010. The maximum typically on offer is 150% of salary. Deloitte's research found that two thirds of bonus plans now incorporate measures based on the company's key performance indicators.

Cahill said: '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.'

Deloitte's analysis shows that 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 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.

Deloitte also found 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 said: 'We think these findings go some way toward explaining why shareholders have generally been more supportive of arrangements this year, compared with 2012. We are starting to see a genuine move towards a stronger alignment between remuneration, company strategy and performance.'

However, Cahill warned that new disclosure requirements due to come in from 2013, which will give shareholders a binding vote on the remuneration policy, risk disrupting this process by encouraging companies to adopt a standard approach rather than one tailored to their particular circumstances.

'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,' Cahill said.

Pat Sweet |Reporter, Accountancy Daily [2010-2021]

Pat Sweet was the former online reporter at Accountancy Daily and contributor to the monthly Accountancy magazine, pub...

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