Fewer executive "fat cats" to get the cream

JUST as there are losers in an economic slowdown there are winners and when it comes to director pay and reward only the best will be good enough.

According to a new report by business advisory firm Deloitte, salary increases for FTSE 350 executive directors have slowed as the harsh realities of the credit crunch and rising raw material costs starts to bite.

The median increase is now 6.2% compared with 7% 12 months ago. But it seems that companies are increasingly willing to pay for the “business superstars” to safeguard a strong management team.

Executive salary increases during 2007 were still around 2% higher than increases in RPI and average earnings and the gap between the potential remuneration of the chief executive and the rest of the board is increasing.

The chief executive in one in three FTSE 100 companies and one in five FTSE 250 companies now has a higher annual and long term incentive opportunity than other board members.

Don Sutherland, associate partner in the global employer services team at Deloitte, North West, said that previous economic downturns had demonstrated that talented leaders who could genuinely change a firm’s fortunes would be retained – at any cost. 

“A number of companies have introduced one-off bespoke remuneration arrangements designed to achieve specific business objectives or in some cases aimed at retaining highly sought after individuals,” he said.

The study also found that remuneration in the very largest UK companies is moving away from the rest of the FTSE 100 organisations.

The typical salary of a chief executive of a top 30 company is well in excess of £1m compared with a typical salary of £750,000 in a FTSE 100 company outside the top 30.

Executive directors in the top 30 companies also have potential incentives worth a further 4 x salary compared with an incentive potential of 2.75 x salary in other FTSE 100 companies.

One in four FTSE 100 and one in five FTSE 250 companies increased the size of the annual bonus in the past year while one in five FTSE 100 companies and one in ten FTSE 250 companies increased the size of the long term share award.

The median potential annual bonus is now 150% of salary in FTSE 100 companies and 185% of salary in the top 30 UK companies, but remains at 100% of salary in FTSE 250 companies.

The amount actually earned has also increased. In the most recent financial period, the bonus payout was typically around 70 to 80% of the maximum possible.

More than three quarters of plans paid out in excess of the target level and only around 6% of executive directors received no annual bonus payout in the period.

In larger companies long term share opportunities also continue to get bigger. In five years the median opportunity has increased from 100% to 165% of salary in FTSE 100 companies and from 125% to 255% of salary in the top 30 UK companies although it remains at 100% of salary in FTSE 250 companies. However, the payouts have been more variable.

But even though companies competing on an international playing field need to reflect that dimension through remuneration arrangements, Mr  Sutherland is predicting a wage dip. 

“It is possible that we have now reached the high water mark and that the world of executive remuneration may begin to change,” he warned.

“For many companies meeting performance targets set two or three years ago is going to be much harder than anticipated and there may be tension as the gap widens between the expectations of shareholders and executives.”

And it seems if that could already be happening. Of awards made in 2003 and 2004, around 30% in FTSE 100 and 20% in FTSE 250 companies lapsed completely; the median payout was around 70% of the total award in FTSE 250 companies and around 60% in FTSE 100 companies.

In the top 30 companies the median payout from awards made in 2004 was 50% of the total award.

“It is clear that payouts under long term plans are much more variable than annual bonuses, suggesting long term awards may be much better correlated to performance,” said Mr Sutherland. 

“Far fewer individuals receive the maximum award and a significant number will receive nothing.”