FTSE 250 companies have reacted more decisively to recessionary pressures than their FTSE 100 counterparts when dealing with executive remuneration, according to a Hewitt New Bridge Street report.
The FTSE 250 Directors’ Remuneration 2009 report, released today by one of the UK’s leading executive remuneration specialists, revealed that 80% of FTSE 250 companies have disclosed a salary freeze for 2009, in comparison to just 60% of FTSE 100 companies.
The median salary for the highest paid directors of FTSE 250 companies is currently £444,000.
As salaries have frozen, bonuses at FTSE 250 companies have also been dampened to some extent. Payments in 2008/09 were 60% of salary, compared to 85% of salary in 2007/08. However, for companies which have a later year-end the research showed that bonuses dropped to 40% of salary.
Rob Burdett, principal consultant at Hewitt New Bridge Street, said: “Our survey shows that FTSE 250 companies have shown restraint on executive pay by freezing directors’ salaries and paying far lower bonuses than in previous years. A number of companies have also reduced long-term incentive award levels. In some respects, they appear to be showing more restraint than FTSE 100 companies.
“There may be several reasons for this. First, FTSE 250 companies are smaller and may be more mindful of the bottom line; they are likely to have a much stronger need to contain costs when compared with FTSE 100 companies.
“Another reason may be the influence of shareholders. FTSE 250 companies typically have a smaller group of larger shareholders who may exert greater influence over remuneration policy. Conversely, the FTSE 100 has a larger group of more varied shareholders. We have certainly seen a higher level of intervention on FTSE 250 remuneration from shareholder groups compared to FTSE 100 pay policies – despite the fact the FTSE 250 has generally demonstrated greater restraint.”
The year ahead
Executive remuneration continues to ignite significant debate and is currently the subject of several consultations.
Rob Burdett said: “Challenging as the past year has been, executive pay issues are likely to be as much of a challenge for remuneration committees in 2010. A tougher regulatory regime is expected with a series of reviews on executive pay that will certainly affect the financial sector and may resonate more widely.
“While we are seeing signs of economic recovery, we do not envisage the past trend of above inflationary salary increases returning. We do expect investors to raise more questions regarding bonus structures and demanding significantly enhanced disclosure on targets, at least at the year-end.
“We also expect to see more account taken of risk in target setting, more deferral of payments and an increase in clawback clauses to protect against bonus payments for illusory short-term performance.”
• Of those FTSE 250 companies that disclose recent pay settlements, around 80% of FTSE 250 companies have frozen salary levels this year (compared to around 60% in the FTSE 100).
• The median salary of FTSE 250 highest paid directors is around £445,000. The corresponding figures in the top and bottom halves of the FTSE 250 (by market capitalisation) are around £515,000 and £410,000 respectively.
• The median salary of FTSE 250 finance directors is £295,000 and that of other executive directors £270,000.
• The median annual bonus potential for executive directors is 100% of salary.
• Actual bonuses earned by all directors in 2008/09 were around 60% of salary. This compares to around 85% of salary for 2007/08.
• Nearly 40% of companies require part of the bonus to be deferred in shares for a period of time (typically three years).
•The most common approach is the sole operation of a performance share plan (nearly 50% of companies).
• Last year, FTSE 250 highest paid directors typically received long-term incentive awards with an ‘expected value’ of around 80% of salary, which broadly equates to an award of 145% of salary at face value under an LTIP.
• Earnings per share and total shareholder return remain the most common measures used in long-term incentive arrangements.
• Nearly 60% of companies have a formal shareholding guideline. The median level of shareholding required is 100% of salary for executive directors.
• Defined contribution pension plans remain the most common approach for directors (50% of directors), and even more so when just newly appointed directors are considered (around two-thirds of new directors).
• The median contribution to a defined contribution plan is around 15% of salary, whilst the median cash salary supplement is around 25% of salary (although the difference in contribution rates between these two types of arrangements is more due to a difference in the constituent companies rather than there being a compelling rationale for higher cash supplements).
• Target total remuneration for highest paid directors is around £1.2m. †For Finance directors and other directors it is around £740,000.
Balance of Package
• Variable pay (that is, annual bonus and long-term incentives) accounts for around 50% of a typical FTSE 250 executive director’s remuneration package (compared to only 37% in 2003).
• Approximately 55% of variable pay relates to long-term performance (compared to around 45% in 2003).
• FTSE 250 top half CEOs packages are more highly geared, with around 55% of their package performance-linked and around 60% of variable pay based on long-term performance.
• Service contracts containing notice periods of 12 months are now the norm. Only around 10% of FTSE 250 companies have notice periods of less than 12 months.
• Around 25% of contracts have liquidated damages clauses. Of these, 40% disclose the inclusion of bonus in the calculation of the termination payment.
• The median non-executive chairman’s fee is £150,000.
•Typically, fees for other non-executive directors range between £40,000 and £50,000 depending on their role.
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