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Trends in directors’ pay
IDS Executive Compensation Review Trends in directors’ pay Steve Tatton Editor IDS Executive Compensation Review LMSUG 20 March 2012
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What I intend to cover Outline the make-up of directors pay packages and how much they are paid. Highlight trends of the last decade showing how we have got to where we are today. Headline summary of our latest findings Discuss two key issues: – relation between pay and performance (HPC research) -Government proposals to reform executive pay
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ECR research on directors’ pay
Annual FTSE 350 survey since 1998 AIM, Fledgling and SmallCap since 2006 Executive Compensation data online since 2009 What we collected in 2011/12 800 listed companies Remuneration data on 2,049 full-time, full year executives Consisting of: - 721 lead executives - 581 finance directors - 747 other board directors
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How are directors’ paid?
base salary benefits short-term incentive, such as annual bonus medium-term incentive, such as deferred and matching shares long-term incentive such as share options, performance shares (LTIPs), or both running concurrently co-investment plan/share ownership requirement Pension plan/pension cash supplement
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Median pay levels of chief executives by market listing 2010/11
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Boardroom incentive schemes 2010/11
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Median incentive payments received by chief executives by market listing 2010/11
AIM Fledgling SmalCap FTSE 250 FTSE 100 Bonus £ £29,000 £23,400 £160,000 £317,500 £924,900 Bonus % of salary 17% 15% 50% 75% 115% % receiving a bonus 51% 58% 78% 89% 96% LTIP £ £204,836 £93,526 £163,106 £319,331 £776,969 LTIP % of salary 39% 54% 62% 146% % receiving LTIP 4% 5% 13% 44% 65% Option gains £ £199,151 £70,778 £215,384 £266,519 £1,775,000 Option gains % of salary 85% 37% 53% 144% % exercising option 8% 3% 20%
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Key trends………… Stress on aligning directors’ and shareholder interests driven a shift in the balance between fixed and variable pay…
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Key trends………… Stress on aligning directors’ and shareholder interests driven a shift in the balance between fixed and variable pay… …but not at expense of salary
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Key trends………… Stress on aligning directors’ and shareholder interests driven a shift in the balance between fixed and variable pay… …but not at expense of salary Ever increasing potential maximum payouts from incentive schemes
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Bonus schemes… target and maxima ever upwards
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Key trends………… Stress on aligning directors’ and shareholder interests driven a shift in the balance between fixed and variable pay… …but not at expense of salary Ever increasing potential maximum payouts from incentive schemes More directors receiving incentives of higher value
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Proportion of FTSE 350 lead executives receiving incentive payments 2000 to 2010
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Weighted average CEO incentive payments 2000 to 2010
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Key trends………… Stress on aligning directors’ and shareholder interests driven a shift in the balance between fixed and variable pay… …but not at expense of salary Ever increasing potential maximum payouts from incentive schemes More directors receiving incentives of higher value Double digit earnings growth over many years
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Indexed median earnings movements of FTSE 350 CEOs and all full-time employees 2000 to 20011
207%
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What happened 2010/11 Salary rises around 3% Bonuses up by 26%
LTIP gains up by 3% Share option gains up by 11% Year-on-year increase in FTSE 100 median total earnings 24% Year-on-year increase in FTSE 250 median total earnings 10%
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Is the pay for performance equation broken
Is the pay for performance equation broken? Findings from High Pay Commission research What has happened to pay of all FTSE 350 directors and corporate performance measures between 2000 and 2010 Remuneration element Change over 10 years Corporate performance measure Salary 63.9% Pre-tax profit 50.5% Bonus 187.0% EPS 73.0% Total Cash 133.4% Year-end share price -5.4% LTIP 253.5% EBITDA 62.0% Share options -40.0% Turnover 80.4% Total Earnings 108.0% Market cap 8.0%
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Back to the future “Just as we have been quite tough on unsustainable and unaffordable things in the public sector, we now need to get tough on irresponsible behaviour of top remuneration of executives in the private sector.” Deputy Prime Minister, December 2011 What the Business Secretary proposes to reform of executive pay… Boost transparency Give shareholders more effective control Increase the diversity of remuneration committees Encourage businesses and investors to lead by example
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