Corporates have been focussed on ‘quick wins’, rather than undertaking more wholesale reviews of their remuneration policies.
An improving economy and resurgent talent market have boosted the pay and bonuses of FTSE 350 business leaders over the last year, reveals an EY report. However new government regulations are increasingly acting as a ‘restraining hand’ with many CEOs of these companies receiving smaller percentage increases to their annual pay than their employees.According to EY’s Future Horizons report, the improving financial performance of FTSE 350 companies has contributed to a 12 percent increase in the total remuneration packages of CEOs compared to last year. CFO’s have also received a 9 percent rise, while other directors have seen a 12 percent rise. These increases have predominately been driven by improved pay-outs of long term incentive rewards, which are designed specifically for executive level remuneration.
However EY says that increases to the salary of CEOs – which forms part of their overall remuneration package – are now closer aligned to the pay awards received by the wider employee population. This follows the introduction of new directors’ remuneration disclosure rules which came into force in October 2013. As part of the new rules, companies are now required to disclose broad based employee pay increases, alongside executive pay. EY’s analysis shows that CEOs in the FTSE 350 received increases of 1.0, 0.9 and 2.5 percentage points less than other employees for salary, benefits and bonuses when looking at the median respectively.
Mark Shelton, EY’s head of executive compensation & reward commented: “It’s perhaps no surprise to see the improving economic and business outlook being reflected in the pay awards of FTSE executives. But greater scrutiny from institutional investors and the introduction of new legislation in remuneration disclosures has led to a rethinking of the relationship between executive and employee rewards.”
Compliance vs wholesale reform
However the report says that, while the new regulations have sparked some behavioural change, many companies have been focussed purely on compliance and ‘quick wins’ to satisfy investors’ concerns rather than implementing more wholesale reforms. Only a third of companies stated that they had undertaken a comprehensive review of their remuneration policies during the year.
The report also points to the relatively low percentage of companies (4 percent) who have introduced new Long Term Incentive Plans (LTIP’s), which link executive pay with sustained long-term business performance. This compares to 5 percent in 2012 and 13 percent in 2011. Shelton concludes: “For many companies, this year was about compliance. But now that the first reporting season under the new regulations has been completed, we expect to see organisations move beyond this governance focused exercise to undertake a proper review of their reward programmes. It is important that organisations ensure that their reward programmes reflect business strategy and are also incentivising to executives and employees.
“We are already seeing the first signs of this happening with shifts toward compliance with governance led remuneration principles. Nearly a fifth of FTSE 100 companies have increased the combined performance and holding period of their Long Term Incentive rewards in their 2014 policies. And more companies are also requiring their executives to hold share awards for up to five years.”Isobel Evans, a director in executive compensation & reward at EY, added “Remuneration packages should promote the success of the business rather than simply focusing on attracting, retaining and motivating staff. They provide an opportunity to drive financial and non-financial behaviours, and therefore can impact long term business growth.”
