Executive reward – What is Happening Today?

As this year’s AGM season passes, a clearer picture emerges of the key trends affecting reward packages of Chief Executives and other senior executives.

Once again, base pay forms only one element of the package, however it remains significant in driving percentage or multiplier cash bonuses and long term incentives. Company size is also an important factor where a CEO in a FTSE350 company earns a total annual package of £1.25m, while CEOs in the largest FTSE companies earn up to four or five times this amount according to the New Bridge Street (NBS) 2007 survey.

While base pay increases for FTSE 250 CEOs are tracking at 6% (NBS) which still exceeds that awarded to the wider UK workforce, it represents relative stability when contrasted to pre 2003 levels. This may be due to a tighter corporate governance framework in which remuneration committees operate and the focus of media attention, however the shift towards ‘at risk’ or performance related pay continues to play a greater role. For example, 13% is the average annual increase of pay ‘at risk’ for performance target achievement since the millennium according to NBS.

The total package of a FTSE30 CEO achieving superior performance more than doubles when compared against target performance results. While this jump has increased the so called ‘quantum’ or total package, this may be linked to the recent impact of private equity acquired companies such as Boots the Chemist in the UK and other high profile examples which draw on a relatively small executive talent pool. Taking a global perspective, companies that operate from the US and those with large US based operations increasingly reflect the US practice of variable or ‘at risk’ pay.

When it comes to retirement benefits, while only 20% of new board level appointments join defined benefit pension schemes, the benefit remains popular for established executives.

Taking a look at long term incentives, the trend to offer long term incentive plans (LTIPs) in preference to share options continues with the Performance Share Plan (PSP) becoming a favoured benefit. Performance conditions are shifting towards multiple measures which typically include a Total Shareholder Return or TSR and Earnings Per Share (EPS).

Take a look at the Tips section below on what factors need to be on your checklist when planning executive reward packages.

Tips: Setting Executive Reward - What Needs to Be Included on Your Checklist? **

Setting executive reward at the right level for a given organisation is becoming more complex and now forms a key role in corporate governance. While decision making responsibility for some organisations is done internally, this responsibility sits with the remuneration committee of the appointed board for public limited companies. Here is a snapshot of some headline factors:

• Size – a primary factor measured by market capitalisation or turnover

• Reward philosophy – market median is the norm for base pay

• Performance – superior performance increases the package over target performance

• Skills and competencies – may impact the available talent pool

• Internal relativities – comparing the pay levels of board executives

• Organisation Sector - e.g. banking packages typically exceed the utilities sector

• Global operations – large presence in US market may result in higher variable pay

• External market pricing – how executive reward packages compare against the market.

Website of the Month

Each month, we’ll give a quick round up of a website and here we look at IVIS, the Institutional Voting Information Service produced by the Association of British Insurers (ABI).

What is the purpose of IVIS? - IVIS reviews annual Reports and Accounts of UK FTSE All Share Index companies to ensure they comply with corporate governance requirements. Key clients are institutional investors who own around a quarter of the UK equity market and who are no longer passive when it comes to executive pay decisions.

What works well? – Check out the IVIS monitoring checklist to provide an ‘at a glance’ assessment of how your executive reward policies and practices align to the requirements of the Combined Code on Corporate Governance and the ABI’s Executive Remuneration Guidelines.

What could be improved – Usability. This is not an easy site to navigate despite the useful content.

Just News

Executive pay at UK’s biggest companies reflects non-financial performance targets.

Executive performance targets are moving away from pure financial measures to include targets such as employee engagement, according to the latest pay survey by PwCMonks to June 2007. According to the survey of more than 500 participants and which includes further data from 1,500 annual reports and accounts, the number of companies using pure financial measures has nearly halved to 17% in 2007, from 33% in 2006. According to PwC Monks, the main factors are companies seeking to offer greater opportunity for bonus aligned to rigorous performance targets and shareholder expectations for increased transparency on executive reward. The survey also indicates growth in bonus paid where the median bonus paid to FTSE100 Chief Executives rose from 78% of base pay to 91% in 2007.

Half of CEOs at Standard & Poor 500 companies earned more than $8.3m last year.

CEOs of companies in the S&P 500 Index that filed proxy information for the first half of 2007 earn more than $8.3m according to AP, the largest news organisation globally. Terry Semel, CEO of Yahoo Inc. total package was $71.7m while the company’s profit and stock performance lagged behind that of its competitor Google. While the lowest salary was over $400k paid to CostCo CEO James Sinegal, this dwarfs behind the 2.4m shares and options to buy 1.2m more shares making up his total compensation. As the Securities & Exchange Commission (SEC) disclosure requirements now include more detailed information to be given on top executives perks, including smaller items such as concierge services, which may be low value however some are already stopping these.

Just Rewards is a free monthly newsletter that is available to anyone who would like to receive it. Who else do you know who would be interested in receiving their own free copy each month? Please forward this issue to them. If you’ve been forwarded this issue and would like to subscribe, please click here. We take your privacy seriously and never share your details with anyone else.

** Please note that this advice is provided as guidance only. If you need specific advice relating to your requirements, please call Reward First on + 44 (0) 1367 710 618. 

Who else do you know who would be interested in receiving this newsletter? Just Rewards is free and anyone can subscribe by clicking here.