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A Guide to Compensation

Your salary, pension, bonus and equity shares: What to expect in your package

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Part one: In this guide to compensation, we look at the types of salary packages chief financial officers can expect following one of the most public and damaging economic crises in history.

The banking crisis of 2007 put executive pay in the spotlight again. While rarely out of the headlines, the business pages have become home to stories about payment for failure and unjustified bonus cultures. Shareholder groups have also become more vocal, demanding more transparency from executive pay deals and an end to guaranteed bumper pay packages.

While the majority of attention has been focused on city investment-banking firms, there is no doubt that the gaze of shareholder activists extends to all members of the board and beyond. In turn, audit and remuneration committees are under increasing pressure to ensure that only the most justifiable pay deals are sanctioned.

As a result, modern executive packages must comprise of four elements – base salary, pension and both short- and long-term bonuses. In some deals, an additional bonus can be included if the CFO in question is charged with a particular project, such as a high-profile refinancing.

What’s changed

The big trend in senior executive compensation over the past couple of years  is that the boards of listed companies and their remuneration committees have become far tougher on highly visible payments such as golden hellos and goodbyes, with the concept of buying CFOs out of large packages becoming a real problem. As a result, CFOs who are tied in to a substantial financial package might find it difficult to get bought out.

Similarly, while bonuses would have been paid as a gesture of goodwill even if a CFO failed to meet his or her obligations, this is no longer the case. For example, if a CFO resigned three months before their long-term investment plan (LTIP) was due to mature they might still have been paid. Today, that isn’t the case and listed – and, as a result, publically scrutinised – organisations will refuse to pay out.

Package components

The most publically recognised element of an executive package is base salary, yet it often makes up a smaller proportion of overall remuneration than many would expect. For example, looking through the 2009 total remuneration of HSBC CFO Douglas Flint, just £700,000 of a total pay of £3.2m came from salary, with the rest made up of short- and long-term bonuses and pension contributions. Similarly, Vodafone’s Andy Halford received a salary of £666,000 on a total remuneration of more than £1.5m.

As defined-benefit pension schemes continue to collapse, the value of executive pensions are being looked at much more carefully and should be an area of real focus for CFOs. For example, the difference between a 10 percent and 20 percent defined contribution is £25,000 a year for a finance director on a salary of £250,000.
For an FD on a defined benefit scheme, the gap between a 10 percent contribution and a final or average salary accrual on an annual basis can be even higher.

For the most senior finance director roles, an annual cash contribution would be in the region of 25-30 percent, while a 1/30th accrual rate is the norm for defined benefit.

Short-term bonus
A short-term bonus scheme usually rewards performance over the course of a 12-month period and can be based on several criteria, ranging from a number of key financial targets as well as softer indicators such as people development and customer satisfaction. Typically, short-term bonuses are paid out against budgets; in other words how the company performs against expectations of how it should have performed.

Long-term incentive plan
As shareholders revolt against the payment-for-failure culture, there has been a significant focus on long-term incentive plans (LTIPs). An LTIP is usually measured over a three-year period, and takes into account a number of different indicators, including performance against the market. This market performance could be earnings per share, shareholder return, return on used capital or performance against a basket of competitors or businesses of the same size.

For the payment to be triggered, it is common for the company in question to be in the upper quartile of companies included in the basket and for the payment to be ratcheted. As a proportion of overall compensation, it’s usually in the region of between 30 percent and 35 percent.


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