Executive pay shows no signs of slowing

Dec 09 2004 by Brian Amble Print This Article

Executive pay rises show few signs of slowing. New figures have revealed that the total remuneration for chief executives has increased by more than five times the average rate for UK employees over the past year.

Total remuneration for chief executives in the last 12 months rose an average 17.6 per cent, according to Watson Wyatt's latest Executive Remuneration Survey.

The executive pay consultants have also found that the "performance-related "element of executive pay now makes up half of total remuneration on average and is on target to be up to two-thirds within five years.

The median total remuneration for a FTSE100 chief executive is now £1.85m, of which £700,000 is basic salary.

The average total remuneration increase for executive directors increased by 13.1 per cent, with a total remuneration value of £840,000.

Most of the pay increase for executives has been performance-linked - annual bonuses and long-term incentive plans - rather than hikes in basic salaries and benefits. The fixed element of chief executives' salaries has fallen to 51 per cent, down from 55 per cent last year.

"There is a long-term trend towards a greater performance-related pay in the boardroom," said Damien Knight, a senior consultant at Watson Wyatt.

"Twenty years ago the performance-related element was about 20 per cent of an executive director's pay while today it accounts for around 50 per cent. In five years' time it could be as high as two-thirds, as it currently is in the US."

According to the research, while the average pay of executive directors has increased substantially, this average hides a growing variance in the actual pay of individual directors year-by-year. Only 57 per cent of FTSE 100 directors achieve or exceed their target bonus.

"This suggests that directors really are being paid for performance, not just for being there," said Damien Knight. "The risk of substantially reduced pay because of not hitting performance targets is real and is happening."

But major question marks remain over how just how far such bonuses really relate to performance. A year ago, however, research by another compensation consultancy, Halliwell, found that more than six out of ten FTSE 100 companies offered 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 - 43 companies - had ‘incentives’ which were given to Directors even if they failed to meet analyst expectations, leading Halliwell to describe the link between pay and executive performance as "nonsense".

Meanwhile, Watson Wyatt notes that the annual bonus is also becoming an increasingly important element of executive pay. In the past three years, average target bonuses for executive directors of the top 30 UK companies have increased from 56 per cent to 67 per cent of basic pay.

"This may in part be in reaction to the spotlight on other elements of pay, such as share plans and pensions." said Damien Knight.

"I think we can expect increasing shareholder scrutiny for this element of executive pay, which will present interesting challenges because the performance measures used for setting annual bonus targets are often commercially sensitive."