Boardroom pay growth slowing

2004

The average pay of Britain's top CEOs hit £1.5m in 2003, according to new research.

But growing pressure for restraint is beginning to have an effect.

Research by accountancy firm, KPMG, shows that the average pay of a FTSE 100 CEO rose some eight per cent last year, four per cent faster than average wages.

During the same period, average executive pay across the FTSE 100 rose seven per cent.

But the growing anger around boardroom pay appears to be having a real effect on remuneration with boardroom salaries expected to rise by only five per cent next year, the lowest rate of increase since the late 1990s.

According to Sean O’Hare, KPMG's head of executive compensation, the slowdown has been forced by growing union anger over excessive pay awards and increased scrutiny from institutional shareholders.

"We are already seeing a sharper focus on boardroom pay from government, institutional investors and the trade unions," he said. "The pressure is definitely on for companies to become more transparent when it comes to paying their top executive and non-executive directors.

"Remuneration committees are under significant pressure this autumn to come up with pay plans that satisfy shareholders, government, trade unions as well as their own chief executive and chairman."

The pay gap between boardroom and employee is also under increased examination from government, O'Hare said, with institutional shareholders and trade unions calling for enforced reporting of the pay gap ratio – something that would bring glaring transparency to the whole issue of boardroom pay.

"All of these things will impact the boardroom pay debate in the coming year,” he added.

The imposition of a £1.5m limit on tax free pension contributions in April 2006 would impact boardroom pay deals and potentially have wider ramifications on the talent pool of boardroom contenders by encouraging a more fluid job market and earlier retirements, the report found.

The report also predicts that the issue of 'performance-related' incentives would become an increasingly hot topic because the targets that such bonuses are based upon do not currently have to be disclosed in remuneration reports.

Last year, research by executive compensation consultancy, Halliwell Consulting found that more than six out of ten FTSE 100 companies offer long-term incentives, often worth more than twice a Directors salary, on the basis of profit growth performance.

But eight out of ten of these firms - 43 companies - had ‘incentives’ which would be given to Directors even if they fail to meet analyst expectations, leading Halliwell to describe the link between pay and executive performance as "nonsense".

The KPMG survey reveals a similar picture, with seven FTSE companies paying 'performance' bonuses despite seeing a fall in their earnings per share growth.

As a result, Sean O'Hare said that company remuneration committees can expect to see even closer examination by shareholders of "the robustness of their annual bonus target-setting processes".