Top firms urged to grasp nettle over executive pay

After two years of pay freezes, pay increases for directors have re-started, according to the latest Executive Directors’ Remuneration report from Deloitte.

Stuart Cottee, a tax partner at Deloitte in Leeds, said: “While there have been positive changes, such as the trend towards more deferral and retention of shares and the increase in claw-back provisions, we are also seeing above- target annual bonuses payouts on a regular basis.

“Remuneration committees need to remain vigilant and ensure that remuneration is fair and reasonable from a participant’s and shareholder’s perspective. Reward should be linked effectively to the long-term strategy and success of the company.”

After two years when many FTSE 350 companies awarded no salary increases to executive directors, most are seeing their salaries rise in 2011.

Increases for main board directors in FTSE 100 companies in 2011 are typically between 2.5 per cent and 7.5 per cent, with a median of four per cent, and between 0.5 per cent and five per cent in FTSE 250 companies, with a median of three per cent.

Mr Cottee said: “It is not surprising that after a two-year period of widespread pay freezes there has been a return to pay increases for executive directors.

“What has surprised us is the number of salary increases above five per cent, 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.”

The maximum annual bonus for FTSE 100 or FTSE 250 executive directors has remained constant at 150 per cent and 100 per cent of salary, respectively.

However, bonus payouts have increased during the year from 71 per cent of maximum to 87 per cent of maximum for FTSE 100 companies, and from 54 per cent of maximum to 86 per cent of maximum for FTSE 250 companies. Over the past 10 years, across all companies, median bonus payouts have consistently been around 70 per cent to 80 per cent of the maximum. Mr Cottee 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.

“A positive development is that over two thirds of FTSE 100 companies and half of FTSE 250 companies now defer part or all the bonus and around half of these companies have also introduced claw-back provisions. This is an encouraging trend.”