Hewitt New Bridge Street research: Executive directors’ bonuses rise

While FTSE 100 organisations have continued to demonstrate some restraint when setting executive salaries, the 2010 FTSE 100 Directors’ Remuneration report from Hewitt New Bridge Street shows that bonuses have increased.

The annual report shows the median total remuneration for the highest paid director in the FTSE 100 is just under £3 million, compared to £2.5 million last year.

Bonuses earned for the highest paid directors in 2009/10 were around 120% of salary, compared to around 90% last year, or around 75% of the maximum potential, 60% last year.

Over a third of FTSE 100 organisations have also frozen salary levels this year, compared to 60% last year. The report shows that where salary increases have been made, the most common rate of increase is broadly in line with inflation.

Rob Burdett, a principal consultant at Hewitt New Bridge Street, said: “The widespread salary freeze imposed in 2009 has thawed to a degree, the days of almost automatic year-on-year above inflationary salary increases for executives are numbered.

“Also, risk and greater transparency over executive pay have been embraced by many remuneration committees. However, bonuses paid this year have reached record levels, driven by the unexpected rate of improvement in economic conditions during the year.

“These bonus levels have not been paid due to companies purposely setting soft targets. In fact, our experience suggested that when these targets were set in early 2009 they were actually set to be tougher relative to budgets, in order to take account of possible reduced profits.

“As a result of better than expected financial results, bonuses paid for performance in 2009 have increased considerably compared to 2008. Shareholders appear to have accepted the explanations provided by companies for these bonus levels, with few instances of open investor revolt during the recent AGM season.”

The report also found that fewer organisations established new long-term incentive plans in 2009/10 than would normally be the case, although more than last year.

The most common pension provision for FTSE 100 directors is the sole operation of a defined contribution (DC) plan with the median employer contribution at 20% of salary. However, potential changes to legislation and the impact of the June 2010 budget will impact on how these organisations plan their executive pensions.

Burdett added: “The evolving legislation on pensions is causing companies to review their existing provision. It is likely that changes in the tax regime to executive pensions are likely to require more thought and potential re-structuring of that element of pay, with a number of companies moving to simple cash supplements.

“Shareholders have, perhaps grudgingly, been accepting of increasing annual bonus opportunities in the belief that the targets were being made significantly harder. However, in each of the past eight years, we have seen higher than target bonuses paid.

“Finally, we believe companies will continue to wrestle with how best to take account of risk when operating their annual bonuses and structuring their remuneration packages.

“The use of formal clawback provisions is expected to become more widespread, a trend we are already beginning to see. In any event, companies may feel the need to conduct a regular formal risk audit of their executive remuneration policies, where they stress test their pay practice.”

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