Firms becoming more cautious about executive pay

Nov 17 2006 by Brian Amble Print This Article

Despite becoming more cautious about the amount they pay their top executives, the UK's top companies are still not doing enough to prove to their shareholders that they are not rewarding mediocrity.

That's according to a new study by Mercer Human Resource Consulting of the reward arrangements for 47 top management positions in 62 major UK organisations, including FTSE 100 companies and other large multinationals.

It reveals that while pay increases for senior managers have been fairly consistent over the last few years and have stabilised considerably compared to five years ago, their rate of increase continues to far outstrip that of other employees.

"This stability is due to a number of factors, particularly the advent of stronger and better informed remuneration committees," said Richard Lamptey, principal at Mercer.

"Media and shareholder scrutiny, increased disclosure requirements and the pressure to control costs have also played a part."

As a result, he argued, that there is still room for improvement when it comes to linking pay and other types of reward to business performance.

Compared to 2001, when median salary increases for top executives were 9.1 per cent, the report found that pay hikes in 2006 have been a comparatively restrained 5 per cent - though arrangements varied considerably between and within organisations.

But these rise pale next to the sums paid to in executives in the U.S, where new figures from the Economic Research Institute revealed this week that the highest-paid received a 48 per cent increase in their average annual cash bonus and were paid 31 per cent more total cash compensation.

Big bonus payments are also common in the UK, the Mercer figures showed, with median annual bonuses in the organisations surveyed at 37.5 per cent of salary in 2006 compared to 41 per cent in 2005.

Yet once again, there are wide variations between companies. For example, bonuses for Group Chief Executives paid out up to 200 per cent of salary while those for Finance Directors were between 0 per cent and 160 per cent.

Interestingly, bonus ranges for many positions were significantly narrower in 2001, when Group Chief Executives' bonuses varied from 10 per cent to 82 per cent of salary.

The survey also found the majority of bonus plans used a combination of financial and non-financial measures, most often with a balanced split of 50:50.

"It is now common for executives to have formal bonus schemes with specific financial and non-financial objectives but, increasingly, the emphasis is on ensuring rewards more closely reflect performance," Richard Lamptey said.

"By improving these links, companies can demonstrate to shareholders that they are not paying for mediocrity."

Performance share plans remain the most prevalent form of long-term incentive (LTIs), with 42 per cent of survey participants operating this type of incentive compared with 36 per cent last year.

The proportion of companies offering bonus matching and other forms of LTIs, such as cash plans, remained broadly stable in 2006.

In separate research, Mercer's analysis of the ABI's Institutional Voting Information Service reports for FTSE 100 and FTSE 250 companies found few companies were flagged up in terms of remuneration-related issues.

Richard Lamptey said that these results were encouraging.

"Remuneration committees are definitely paying more attention to public perceptions of executive pay practices. Companies now make greater effort to contain potential excesses, and give plenty of explanation where greater awards are necessary to attract and retain the high-calibre individuals that are crucial to success."