The increasing use of performance-related incentives has led to an overall fall in the average remuneration of the bosses of Britain's largest companies, new figures have revealed.
The increasingly demanding performance conditions imposed on the long-term incentive plans of FTSE 100 chief executives means that their total remuneration has fallen on average by 7 per cent to £2.1m, according to consultants Watson Wyatt.
But its 2005 Executive Reward Survey also found that the average basic salary and bonus for a FTSE 100 chief executive have continued to rise this year, by 9.1 per cent and 29 per cent per cent respectively.
These increased bonuses have been paid out this year to reward an average increase in profits last year of 20 per cent. But because the value of their long-term incentives has in many cases been reduced, the figure for average remuneration has also fallen.
The study found that the basic salaries and bonuses for other FTSE 100 executive directors have also risen - by 7.8 per cent and 22 per cent respectively - while on average overall their total remuneration has fallen by 18 per cent to £980,000.
"There is a risk that institutional investors may have been too tough in their attempts to ensure executive pay is aligned to shareholder interests," said Damien Knight, an executive reward consultant at Watson Wyatt.
"Shareholders have understandably been keen to use performance conditions to ensure that the long-term incentives offered to executives are paid out on their actual performance rather than fortunate market conditions. But the performance measures they have imposed have in some cases reduced the real value of the incentives to the executives.
"The question is: does this leave executives suitably motivated and aligned to shareholders' interests?"
According to Watson Wyatt, the value of long-term incentive plans, such as share option plans, has also been undermined by the relatively low volatility in the stock market. Lower volatility has the effect of reducing the potential upside of share options.