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How much does your boss earn?

Increasing shareholder activism and a perceived disconnect with performance has put pay back in the spotlight

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The issue of executive pay has long been a contentious one. Ever since the nineteenth century, when the robber barons of the US began accumulating wealth at an astonishing rate, outstripping their workers’ wage rises by huge multiples, how much the boss gets paid has been a source of controversy.

But for many years through the recent boom, it fell down the agenda. Businesses were, on the whole, enjoying healthy growth, workers’ wages were rising, so what was the problem if the chief executive and CFO both banked healthy bonuses on top of rising base salaries?

Financial service firms, in particular, appeared to be locked into an arms race of bonuses, with each competing to see which of their ‘masters of the universe’ directors had the biggest package.

But that was then. Post-crash, the issue of executive pay, and especially bonuses, has returned to the fore. The sight of banking chief executives hauled before select committees to explain quite why they awarded themselves such huge bonus packages while headcounts were slashed and billions wiped off share values has become commonplace. Meanwhile corporate failures on the scale of the BP Gulf spill seemed to fly in the face of continued increases in bonuses.  

For CFOs, the fallout was a little less public, but the scrutiny that followed the banking crisis has meant that shareholders are now far more likely to read remuneration reports than they once were. And for many, the experience will be a sobering and frustrating experience.

Shareholder mood swings

For executives looking for their next job, there is no doubt that times have changed. “They have to be aware of shareholders’ mood as well as corporate strategy: remuneration committees are keen not to increase remuneration costs at the moment, and that has had the effect of keeping increases low,” says Peter Smith, partner at leading headhunters Kepler Associates. “As a result, we’ve seen that salary increases of about 3 percent this year for senior execs.”

And those that are awarding bonuses are also under increasing pressure to improve how they explain and communicate the criteria behind incentive awards. There is clearly some way to go. “We have remuneration reports that are quite often more like compliance reports,” says Sean O’Hare, reward partner at PwC. “They give a lot of information, true, but it’s not a communication exercise, but more a box ticking one.”

O’Hare speaks with experience, having just overseen the publication of PwC’s latest remuneration survey that has looked at the top 350 public companies in the UK. The findings show that salary increases are likely to remain modest in 2011, hovering around 3 percent. However, this is presenting a challenge for some companies in terms of managing employee expectations in a higher inflationary world.

In that context, the significance of the annual bonus and long term incentive plans has increased. There have been suggestions that executives are now beginning to look at the bonus as a way of circumnavigating the hostility of shareholders to major increases in executive salaries.

Peter Smith, a partner at management consultants Kepler associates, says that while there is downward pressure on salaries at the top, most firms are taking a cautious approach to bonus packages. “Whether bonuses are being used to compensate for sluggish growth in salaries, I haven’t seen that trend emerging strongly, though there are always exceptions to the rule,” he says.

“However, we have seen the structure of bonuses becoming more based on discretion. So the typical bonus plan will be 75 percent-based on a set formula and 25 percent on discretion. And the formula will be a profit or cash flow measure and the discretionary element will be at the direction of the board, often based around personal objectives that are non-financial in their nature.”


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