FTSE 250 adopted a more ‘cautious approach’ to executive pay this year, reveals Ernst & Young report
Volatile corporate performance and challenging economic conditions have resulted in a cautious approach to executive remuneration this year. According to an Ernst & Young report released today, the median salary for CEOs of FTSE 250 companies increased by 3.1%, while 17% were subject to a pay freeze. In comparison the median salaries of CEOs in smaller companies increased by 2.3%, with over 27% experiencing a pay freeze.
Ernst & Young’s report, Changing landscape of executive remuneration, analyses current trends and market practice in director’s remuneration in over 600 FTSE 250, FTSE Smallcap, FTSE Fledgling and AIM listed companies. The release of the report comes at a time when executive remuneration is once again in the spotlight following the Association of British Insurers’ (ABI) update to its guidance on executive remuneration and Business Secretary Vince Cable’s endorsement of the remuneration related recommendations in the Kay Report.
Modest salary increases reflect greater shareholder scrutiny
Giles Capon, leader of Ernst & Young’s UK and Ireland Performance and Reward team commented: “Increases to base salaries, from the FTSE 250 through to FTSE Fledgling, have been modest. Shareholders have taken a tougher stance over remuneration levels due to growing concern and scrutiny over the perceived misalignment between corporate performance and reward payouts, while the ongoing economic uncertainty is also encouraging greater restraint.”
Median bonus payout to FTSE 250 CEO was £408,000
According to the report 90% of FTSE 250 executives received an annual bonus in 2011/12. In the smaller companies this figure was slightly lower at 70%. Median actual bonus payments as a percentage of base salary increased marginally for all executive positions. However bonuses were significantly lower for smaller companies compared to their FTSE 250 counterparts, with a median bonus of £51,000 compared to £408,000, respectively.
Bonuses for CEOs in the FTSE 250 finance sector showed the biggest shift from the previous year. Bonus payments were 20% below the FTSE 250 median, whereas in 2010/11 they were 20% above.
Capon added: “Bonus deferral schemes are now common practice particularly amongst larger FTSE 250 companies. Nearly 60% of the FTSE 250 operate some form of deferral mechanism, whether it is part of a mandatory share scheme or a voluntary arrangement. The ongoing focus on ensuring executive remuneration is aligned with long-term sustainable value creation will likely see more companies adopt deferral mechanisms. We expect that companies with deferral mechanisms will increasingly incorporate clawback provisions into bonus plan design to ensure remuneration risk is mitigated.” 40% of FTSE 250 companies now incorporate clawback provisions, up from 25% in the previous year.
Pressure on long-term incentive (LTI) payouts
For FTSE 250 executives, there was a continuation of homogenous long term incentive design, with nil-cost options and relative Total Shareholder Return (TSR) and/or Earnings Per Share (EPS) growth performance conditions dominating. However, vesting remains weak with LTI awards failing to vest for over 50% of executive roles. In the smaller companies, the majority of executives received no value from long-term incentive vesting.
Restraint on remuneration will continue but we expect changes to disclosures and structure in 2013
With the UK’s economic recovery expected to be slow and patchy, growing by just 1.2% next year according to forecasts from the Ernst & Young ITEM Club, the report says that remuneration levels in 2013 are likely to remain constrained.
Capon concluded: “We expect more of the same next year. Base salary increases across most industries will be modest and in-line with inflation or broader employee salary rises. While there is likely to be a heightened focus on performance related pay, the challenging operating environment could make it harder to achieve any incentive plan performance targets, which would inevitably result in lower bonuses. Enhanced disclosure and communication of the rationale for bonus outcomes will be crucial as shareholder scrutiny of bonus payments will continue.
“One area where there may be some change will be around long-term incentive performance measures. Revisions to the ABI’s remuneration guidelines earlier this week show that shareholders are increasingly open to measures which are more tailored and support long-term business strategy. Whilst the move away from relative TSR and EPS growth measures will not happen overnight, we expect that in 2013 there will a greater appetite for change and more tailored performance measures will emerge with stronger linkage to business strategy and long-term value creation.”