Bonuses double executives' pay

Sep 19 2005 by Nic Paton Print This Article

Britain's top business leaders are now commonly enjoying bonuses worth 100 per cent of their salaries, with some getting as much as 150 per cent, according to new research.

The findings from consultancy Deloitte are bound to fuel the debate about whether Britain's bosses are fat cats or simply being paid what they deserve.

Deloitte found basic salaries for executive directors were increasingly more slowly than in the past, with those in the FTSE 350 going up 6.5 per cent compared to 7.1 per cent in 2004 and 7.5 per cent in 2003.

The typical maximum annual bonus award was now 100 per cent of salary for both FTSE 100 and FTSE 250 companies, it added.

Within the 30 largest UK companies the maximum potential bonus increased from 125 per cent to 150 per cent of salary.

For achieving on target performance, 50 per cent of the potential bonus was commonly earned.

Carol Arrowsmith, lead partner and remuneration specialist at Deloitte, said: "The rise in bonus levels has been accompanied by an increase in the introduction of a deferred element in these plans.

"Deferred annual incentive plans are now in place in 61 per cent of FTSE 100 companies and 44 per cent of FTSE 250 companies, compared to 56 per cent and 34 per cent two years ago," she added.

Deferral arrangements varied greatly, but typically they required some of the annual bonus to be paid in shares which had then be retained for several years, working as a "lock in".

There was also the opportunity to receive additional "matching" shares if further performance criteria were achieved during the deferral period.

The number of share option plans being introduced and in operation was decreasing, with performance share plans being used in their place, said Deloitte.

Share options were regularly granted to executive directors in 52 per cent of FTSE 100 companies and 48 per cent of FTSE 250 companies, compared to 85 per cent and 76 per cent respectively two years ago.

Performance share plans were now operated by 82 per cent of FTSE 100 companies and 62 per cent of FTSE 250 companies compared to 64 per cent and 43 per cent respectively two years ago. "One reason for this trend is the requirement for companies to count the cost of options towards profits," said Arrowsmith.

"Also, many companies feel that performance shares provide a clearer link between pay and performance.

"However, it is still too early to predict the end of share options and it should be remembered that they do still have an important 'gain sharing' role," she added.

The value of executive pensions was also significant and this was expected to lead to increasing attention from City institutions, who would be seeking an explanation and justification for generous pension arrangements, she forecast.

Just 2 per cent of executive directors in FTSE 100 and 3 per cent in FTSE 250 companies now had a notice period in more than 12 months compared to 16 per cent and 11 per cent two years ago, pointed out Arrowsmith.

This decrease had followed pressure from shareholders and governance bodies over the past two years to eradicate the possibility of rewarding executives when the business has failed, she added.

"Over the next twelve months we can anticipate that governance bodies will focus on three key areas.

"Shareholders want to see evidence that companies are using robust and sensible methodologies to set pay.

"They will also want to see further alignment of the performance measures used in share incentive plans and the requirements and strategic objectives of the business," she explained.

"Finally, there will be increased scrutiny on pension arrangements and in particular on defined benefits arrangements with regards to their size and appropriateness," Arrowsmith concluded.

Directors at FTSE 350 firms earned on average between 1.4 million and 446,000 a year, the survey added.