Research Highlights Effects of Recession on Executive Pay
19 August 2009
London – The 2009 FTSE 100 Directors' Remuneration report by Hewitt New Bridge Street, the UK's leading executive remuneration specialists, shows how the country's top companies have reacted to the changing economic environment. While it is clear they have taken increasing notice of investors' views when structuring directors' remuneration packages, the report also demonstrates that there may still be room for improvement.
The Hewitt New Bridge Street report shows that around 60% of companies have responded to the downturn by freezing salary levels in the past year, with the median salary of FTSE 100 highest paid directors being £800,000. Actual bonuses earned in 2008/09 have also reduced to around 90% of salary (or around 65% of the maximum potential). This compares with last year's figure of around 110% of salary or 80% of the maximum.
There is also evidence that some companies have reflected falls in the share price by reducing share award levels, as a percentage of salary. Of those that disclose their long-term incentive plan (LTIP) policy - only around a quarter of the FTSE 100 - over 40% disclosed a policy of lower grant sizes for 2009.
David Tankel, principal consultant at Hewitt New Bridge Street, said: "The arrival of recession in the UK economy has left its mark on the remuneration packages of the directors of its leading companies. With the economy experiencing dramatic change, companies have taken into account investors' opinions and, of companies that disclosed details of their 2009 salary settlement, almost 60% have adopted a pay freeze. Those that did not attracted significant flak from the investor community.
On the other hand, while the recession has had its impact on bonus payments, which fell from 2008 levels, bonuses still remained relatively high. While there have been variations, with the figure for companies with a March 2009 year-end – and therefore including more of the downturn than companies which reported earlier – standing at 50% of salary rather than the 70% of salary seen at companies with a December year-end, overall bonus payments are higher than many would have expected.
Although bonus payments were lower than in recent years, companies have continued to pay over half of the maximum potential amount during a period when nearly all FTSE 100 companies saw their share price fall and when most companies' profits had been impacted by the recession. This has inevitably raised the question of whether bonus schemes are still linking pay and performance appropriately.
Our experience has been that for 2009 many companies have been adopting a tougher payment schedule relative to budget than in prior years to reflect the fact that the budgeted number may be lower than in prior years, with a higher 'start to earn' point and a tougher stretch target above budget at which point the bonus pays out in full.
One more hidden aspect of the past year, is the recession's effects on directors' personal worth, in that executives are often typically large shareholders and they have therefore been significantly hit by falls in share prices. We estimate that the median fall in value of shareholding for a FTSE 100 highest paid director was over £600,000 during the year to 1 April 2009."
Into 2010
Executive pay issues are likely to remain problematic into 2010, with the possibility that many companies may post financial results for 2009 which are worse than for the past year – a situation which would increase the focus on the link between pay and performance.
