Share incentives boost bosses’ pay

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AVERAGE earnings of top company executives have increased by 27 per cent in the past year because of a rise in share-based incentive schemes, according to new research.

Increases in the basic pay and bonuses of directors in FTSE-100 firms has slowed, almost to a halt, said Incomes Data Services (IDS).

But there has been a big rise in the value of long term incentive plans (LTIPs), pushing average increases in total earnings up by 27 per cent.

The value of LTIPs rose by 81 per cent to £938,000 for directors and to a median figure of £1.6 million for chief executives, said the report.

IDS said average total earnings of chief executives in FTSE-100 companies was £4 million in the year to June.

Directors’ pay increased by a median of 3.5 per cent, while the value of bonuses fell by 4.9 per cent, the study found.

Steve Tatton of IDS said: “Whether a reaction to Government pressure, shareholder concerns or a worse than expected business environment, it seems the brakes have been applied to the basic pay growth for FTSE-100 bosses.

“However, while shareholders will be pleased to see more traditional elements of pay seemingly slowing, these figures show that directors’ earnings can still grow significantly as a result of a complex mix of incentives.”

LTIPs are now used by more than 90 per cent of FTSE-100 firms and are designed to incentivise directors over a longer term period, said the report.

They are typically granted in the form of shares and are closely linked to shareholder returns, with directors typically having to reach a minimum target before any shares are granted.

“Many LTIPs are based on comparative performance with competitors, rather than their own company’s historical performance, meaning that directors stand to earn a payment even if their company’s performance has worsened - as long as their chosen peer group has done even worse,” said the IDS report.

“More directors are receiving LTIP awards of higher value as a result of the evolution of plan design over the last decade.

“In particular, the maximum value of the share grants received from LTIPs has been steadily increasing over time and when equity prices were low, as they were during 2008 and 2009, directors were allocated a large block of shares.

“When share prices have subsequently risen, as they have since the depth of the recession, directors have had the potential to profit from ‘windfall’ LTIP gains.”

TUC General Secretary Brendan Barber commented: “Directors have proved that executive pay structures are not fit-for-purpose by securing another huge earnings boost, even while ordinary workers suffer flat or even falling wages.

“An 81 per cent increase in long-term incentive plans when the economy is struggling to climb out of a double-dip recession shows just how flawed the so-called performance elements of directors’ remuneration have become.

“We still have way to go to bring a sense of reality to executive pay and ensure that directors’ pay is aligned with the long-term health of the company rather than simply its share price.”

Unite general secretary Len McCluskey said: “While millions of working people are either without work, or having their pay frozen or slashed, Britain’s boardrooms are finding even more devious ways to squeeze more cash from their companies.

“Wages for many working people have stagnated since 2003 and have fallen in real terms since the recession hit.

“But the richest have continued to pull ahead. The top 10 per cent have 12 times more income than the bottom 10 per cent. Scandalously, Britain has the fastest growing income inequality compared to other developed countries.

“What is particularly sickening is that some of the companies may be performing poorly - but the cash registers are always ringing for these directors.”

Unison general secretary Dave Prentis said: “The Government is guilty of allowing the gap between the rich at the top and those at the bottom to grow. It has used the recession to hold down wages in the public sector and cut jobs and services, while those at the top continue to enjoy a champagne lifestyle.

“It is clearly ridiculous that taxpayers are landed with a bill of between £6 billion and £7 billion a year for in-work benefits because scrooge bosses are lining their own pockets.”