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Executive pay rises exceed 5 percent at UK plc

Director pay at UK's top companies rises again without clear link between pay and performance, says Deloitte study

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Director pay at the UK’s top companies is on the rise again, exceeding 5 percent in some cases with little evidence of a link between payout and performance, according to a new study.

After two years of restraint, FTSE 100 board directors are enjoying pay rises of between 2.5 percent to 7.5 percent, with a median of 4 percent. AT FTSE 250 level directors are typically receiving between 0.5 percent to 5 percent, with a median of 3 percent.

Management at the FTSE 350 still need to better align executive pay with shareholder returns despite progress in remuneration structures, according to the latest Executive Directors’ Remuneration report from Deloitte.

The study will add more fuel to the debate on executive pay following the publication last week of a report by the High Pay Commission that found over the past decade executive pay at UK plc rose 187 percent while average share prices plummeted 71 percent.

“What has surprised us is the number of salary increases above 5 percent, which is significantly above inflation and the increase in average employee earnings.  Remuneration committees should consider increasing salaries only where there is a real and compelling reason to do so and any increases should be limited to the general level of increase for other employees, unless exceptional circumstances exist,” Stephen Cahill, partner in the remuneration team at Deloitte, said.

Deloitte recommended that remuneration committees ensure base salary rises are limited to those of the general population and if executive pay is above market median “then the remuneration committees should consider implementing a pay freeze in order to exhibit restraint in these difficult times”.

Cahill added that executive pay should be linked effectively to the long-term strategy and success of the company.

Companies delivering the strongest returns to shareholders exhibited two common behaviours: they had a more consistent and longer serving senior team than the general market and these teams typically had much larger shareholdings, the study found.

Maximum annual bonus opportunities for FTSE 100 or FTSE 250 executive directors remained constant at 150 percent and 100 percent of salary, respectively but bonus payouts rose during the year from 71 percent of maximum to 87 percent of maximum for FTSE 100 companies. For FTSE 250 companies the figure rose from 54 percent of maximum to 86 percent. 

Over the past decade, median bonus payouts have consistently hit between 70 percent to 80 percent of the maximum.

Cahill said: “Annual bonus plans are an area where some hard thinking should be done. There is a very strong argument for a recalibration of both targets and expectations to ensure that these payouts do not, in effect, become almost guaranteed.

Positive findings in the survey included the trend towards more deferral and retention of shares and the increase in clawback provisions.

“This is an encouraging trend. It is clearly good practice to ensure there are provisions allowing for deferred or unvested awards to lapse in the event of gross misconduct, misstatement of results, or where there has been a miscalculation of the extent to which performance conditions were met,” Cahill added.

The report is based on information from the latest report and accounts of 299 companies in the FTSE 350 as at 1 July 2011.


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