Client Affairs

Superstars Zoom Ahead in Pay Stakes

Stephen Harris 18 September 2005

Superstars Zoom Ahead in Pay Stakes

The pay divide between the bosses of Britain’s largest companies and those a little below them is widening, according to the latest survey b...

The pay divide between the bosses of Britain’s largest companies and those a little below them is widening, according to the latest survey by consultancy Independent Remuneration Solutions, and Manifest, a proxy voting agency. The median rise in chief executive remuneration for businesses with more than £1 billion in turnover was 16 per cent last year compared with 6 per cent for those whose enterprises turned over less than £300 million, the survey of 903 companies found. The survey includes data from 281 companies who have reported since 1 January 2005 and gives the most up to picture of remuneration levels and trends. The 16 per cent increase is higher than the corresponding figure last year of 10 per cent, but slightly below the long term trend growth of 21 per cent pa since 1998. Total remuneration at £2.1 million pa for large companies (IRS define large companies as the 151 with turnover above £1 billion pa) is now 208 per cent higher than in 1998. In the same period average UK earnings went up 33 per cent, retail prices by 15 per cent, and the FTSE 100 fell 13 per cent. The survey defines total remuneration as the cash pay received plus the expected value of awards options and long-term incentive share plans plus the transfer value of the increase in pension benefit. Much of this data is not transparent in annual reports, so IRS and Manifest make their own estimates of the values of options and share schemes. Salary growth eased to only 6 per cent in large companies from 7 per cent last year. But total remuneration increased by 16 per cent, driven by ”performance-related” pay, i.e. bonus, options and share incentive schemes, which grew by 21 per cent - driven partly by increased quantum of awards but mainly by the growth in the number of schemes. Annual bonuses are universal. Most large companies now have two or even three long term incentives such as share options, LTIPs, restricted shares, co-investment plans and deferred bonus with or without matching performance shares. Each year the executive receives awards from each plan. The complexity of these arrangements makes it difficult for the executive to understand their pay, yet alone the shareholders. One quarter of large companies’ CEOs received salary increases of 11 per cent or more. Cliff Weight, the report's author and IRS director, told WealthBriefing “This is as I predicted - a surge in salaries as directors seek to maximise their pension benefit prior to the new pension rules becoming effective on 6th April 2006. It is another example of the law of unintended consequences when Governments try to set limits on directors’ remuneration.” Moderation in Smaller Companies The IRS/Manifest survey now covers 903 companies, 32 per cent more than before. This significantly improves the comprehensiveness of the data and has highlighted the difference in approach in smaller companies, where total remuneration rose by 6 per cent and salaries by 5 per cent. Mr Weight told WB: “In smaller companies – which we define as those with less than £300 million turnover - remuneration is much simpler and easier to understand. Most remuneration is in the form of salary. Bonuses are modest and targets are stretching. Long-term incentives are mainly in the form of options and modest in size. Our survey shows many companies have not paid bonuses and most long term incentive plans have not paid out.” In large companies the bonus maximum opportunity is much higher and bonus payments average 63 per cent salary (compared to 17 per cent for smaller companies). The difference in long term incentive payouts is even more striking –median payout in larger companies is £262,000 pa and nothing in smaller companies. Sarah Wilson, Managing Director of Manifest, said, ” The growing complexity in directors’ pay is delivering value to directors. Whether it is good value for shareholders is questionable.” Recently, in the Financial Times Miles Templeman, director-general of the UK’s Institute of Directors, commenting on the survey saying he believes complexity is not ideal but may be essential in modern performance-related pay schemes. “We need to pay to get the right people at the top and we need to reward them on performance. Complexity can be a bit of a problem but in another way it reflects that pay may be more complex if it is related to performance,” And Michael McKersie, investment affairs manager at the Association of British Insurers, said: “More pay by bonus is generally speaking a good thing but there are probably limits to what the appropriate ratio is.”

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