Executive salary increases start to fall

Nov 08 2002 by Brian Amble Print This Article

Salary increases for executive directors and senior executives in the UK’s top companies fell significantly this year, according to a study by Mercer Human Resource Consulting. However, bonus awards increased, suggesting that pressure from shareholders has put more focus on performance-related pay.

The median salary increase in 2002 was 5.4 per cent for top executives compared to 9.1 per cent in 2001. Results show that the number of companies awarding executives a salary increase of less than 5 per cent has almost doubled in the last year (45 per cent in 2002 compared to 23 per cent in 2001), while fewer companies have given salary increases of more than 15 per cent (15 per cent in 2002 against 27 per cent in 2001).

Belinda Hudson, European Partner at Mercer, said: "Many companies have dropped the level of base pay increases and put more emphasis on performance-related bonus payments. This reflects the growing pressure on firms from shareholders to demonstrate the link between pay and performance."

The survey of 30 top UK companies found that, while salary increases fell, average total cash rewards including base salary plus actual bonus was 26 per cent higher than the previous year.

On average, bonus awards have increased, though they vary significantly from one to company to another. For example, bonuses for Group Chief Executives ranged from 19 per cent to 140 per cent of salary, while for Finance Directors bonuses varied from between 6 per cent to 125 per cent of pay. The median bonus in this year’s study was 44 per cent compared to 35 per cent last year and 33 per cent in 2000.

The majority of bonus plans (61 per cent) use a combination of financial and non-financial performance measures, with 60 per cent financial to 40 per cent non-financial the most widely used combination.

The study also looked at long-term incentive plans and share options and found that these are now operated by 43 per cent of companies. "In the current economic climate, companies are seeking appropriate measures to drive company value and reward their executives.” Ms Hudson said. “Many are thinking about moving away from traditional performance measures such as earnings per share."

Increasingly, companies recognise the importance of linking short-term and long-term performance. Almost half of the companies surveyed (44 per cent) now have a deferred share element to their annual bonus scheme, either for retention purposes or to provide additional reward contingent on future performance.

Copies of Mercer’s Executive Compensation Guide are available from Adam Parsons on 020 7423 5728 or here

The effective date of the pay and benefits data analysed in this study is 1 July 2002. Pay increases relate to the end of the financial year i.e 31st December 2001 or 31 March 2002. Bonus payments made in 2001 relate to performance in 2001 or in the 2001/2002 financial year.

The survey covered pay for board level and senior executives. Thirty UK companies participated in the survey, with a median turnover of £5.6 billion and a median market value of £10.6 billion.