MM&K and Manifest research: CEO remuneration quadruples over 12-year period

Chief executive officer (CEO) remuneration continues to rise, quadrupling over the past 12-year period.

This is according to the†Executive Director Total Remuneration Survey 2011, by MM&K and Manifest, which also found poor correlation between remuneration, performance and shareholder value.

The survey found that while the median FTSE 100 CEO remuneration was up 32% in 2010 from 2009, the FTSE 100 index only rose by 9% over the same period.

The survey identifies a shift from longer-term incentives (typically over three years) to annual bonuses, mirroring the approach that caused so many problems in the banking sector.

Furthermore, as most remuneration strategies now involve the use of long-term incentive plans (Ltips), reward horizons have shortened to only three years. A decade ago, the horizon average was seven to ten years.

According to MM&K and Manifest, this ‘management myopia’ is accentuated among larger employers where complex schemes contain multiple reward thresholds.

This means that the typical CEO receives rewards for even the most basic levels of performance regardless of whether they attain an exceptional outcome for the organisation with many requiring, to vest the maximum award, only earnings per share (EPS) growth of the retail prices index (RPI) plus 9% per annum.

The survey found that the deferral of bonuses has become increasingly common; 74% of FTSE 100 organisations are estimated to have a deferred bonus plan and 52% of the FTSE 250.

These plans have been introduced at that same time that bonus levels have also been increased, so the impact on executives’ cash earnings have been mitigated and, over the long run, been considerably enhanced.

Cliff Weight, director at MM&K said: “The key determinants of a successful incentive remuneration strategy revolve around choosing the right blend of short and long-term performance criteria together with rigour and toughness in the target setting.”

Sarah Wilson, CEO of Manifest, added: “Shareholders are increasingly looking for more aggressive strategic target settings which also take into account risk management and environmental, social and governance factors rather than reliance on somewhat outdated market-based measures such as EPS.

“There is a level of frustration that remuneration committees are developing a ‘tin ear’ and do not see high levels of voting dissent as something to be concerned about.

“Remuneration committee chairmen need to reach out to their key investors directly rather than assuming that box-ticking compliance with trade association guidance is going to see them home and dry.”

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