Almost a quarter (23%) of FTSE 350 firms are planning to freeze executive pay this year, according to new research from PricewaterhouseCoopers (PWC).
The survey, compiled from interviews with FTSE 350 reward professionals, found that salary increases, where given, are expected to be around 3%, higher than last year (2.8%) but significantly down on the 6% increases of 2007 and 2008.
However, 30% of organisations are planning to increase the maximum potential bonus. In 2010 the average maximum potential bonus for FTSE 100 chief executive officers (CEOs) rose for the first time in three years from 150% to 175% of base salary.
Actual bonus payments also increased substantially this year. The average actual bonus for a FTSE CEO was 111% of base salary, almost 30% higher than the previous year.
Half of the firms planning to increase the maximum potential bonus this year are also implementing a new deferred bonus plan, which will include some compulsory deferral.
PWC’s analysis showed that 72% of FTSE 100 and 58% of FTSE 250 firms now have deferred bonus plans, and for 65% of these the entire deferral is compulsory. Typically in such plans, 50% of the bonus will be deferred.
The survey also found that FTSE 350 firms are taking other steps to ensure a clearer link between risk and reward this year. A fifth (20%) of respondents are planning to introduce clawback, on top of the 20% that already have.
Clawback methods being considered include scaling back deferred bonuses and long-term incentives, but also reclaiming cash bonuses in certain situations.
Sean O’Hare, reward partner at PWC, said: “Shareholder activism on pay has stepped up substantially over the last few years and seems to be having an effect.
“It looks like 2011 will be the third consecutive year of pay rise restraint, with increases lower or in line with national average earnings after years of rising much faster. The difficulty for remuneration committees will be managing executives’ expectations, which are rising again post recession.
“Increasing the potential bonus opportunity will cause shareholders to focus on how tough the targets are. Last year a number of firms recovered more swiftly than expected meaning that bonus targets were comfortably exceeded.
“A third of organisations are consequently amending performance conditions this year, with 17% increasing the level of performance required to achieve maximum pay-out. They will need to get it right as a significant increase in bonus payments will result in difficult conversations with shareholders, who feel that the moderation in bonus levels caused by the recession was rather short-lived. But it will not be easy.
“Choosing robust performance targets that are aligned to business strategy and understood by the individual was the most frequently cited challenge by the reward professionals we surveyed. Given current economic volatility and political scrutiny, decisions on pay are not going to get easier.
“However, firms are undoubtedly taking steps to ensure pay is better aligned with performance. If these changes are communicated and understood by both executives and shareholders, and resulting compensation levels therefore felt to be fair, future reporting seasons may be slightly less fraught.
“To get this right may require remuneration committees to have more discretion over bonus outcomes – not something shareholders have supported in the past.”
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