Companies planning third year of bonus reductions at upcoming AGMs despite economic recovery, says PwC research

Published at 00:01 AM on 01 April 2014

PwC analysis shows 2014 is set to be another year of executive pay restraint as early reporting shows FTSE100 executives have seen their bonuses fall for the third consecutive year and nearly a quarter have had their base pay frozen.

PwC’s analysis of FTSE100 companies with year ends from 30th September 2013 onwards reveals that CEOs’ median bonus payouts for 2013 were £1.14m, with CEOs on average receiving bonuses 1% lower than 2012.This signals the third consecutive year of bonus reductions and tougher performance assessments, in spite of economic recovery and a 10% increase in the FTSE100 index during 2013.

The picture on salary is similar, with nearly a quarter of executives receiving no salary increase in 2013. Where increases were given, these were largely in line with inflation and increases for the general workforce at less than 3%. The median salary for CEOs in the companies that have reported is £898,000.

Median total pay, including long-term incentive pay-outs, increased by just 0.5% for CEOs in post in both years.

PwC’s supplementary survey of large UK companies suggests that the trend for moderate pay increases and bonus pay-outs will continue in the medium-term, as over half (60%) of organisations expect the overall level of senior executive pay to be within 10% of current levels over the next five years. This is being driven by market trends and the pressure to link pay more closely to performance.

The new disclosure rules are also having an impact on remuneration committee decision-making.  Around one third of companies believe their remuneration committee is more focused on the fairness between executives and the wider workforce when making pay decisions as a result of the rules.

Tom Gosling, head of PwC’s reward practice, said:

“The 2014 AGM season is shaping up to be another year of restraint. Despite fears that executive pay inflation would take off again as the economy recovers, this doesn’t seem to be the case. Executives are seeing only modest salary increases and bonuses continue to fall. Remuneration committees are approaching any increase in pay-outs with caution to ensure they accurately reflect performance and satisfy shareholders.

“Even when long-term incentives are included, total pay has only risen by 0.5% year on year, despite the recovering stock market which tends to increase the value of share awards.

“Remuneration committees are clearly listening to shareholders, are exercising restraint in their decision-making and working hard to ensure pay only increases when performance improves.

“The extent of executive director salary freezes since the financial crisis is one of the untold stories of executive pay restraint. It is now common practice that executive pay rises are in line with the rest of the workforce.  The desire to demonstrate fairness within the workforce on pay decisions is now much higher up remuneration committees’ agendas.

“It seems less and less likely that executive pay inflation will return to the levels seen before the financial crisis. Most organisations expect pay to plateau over the next five years as shareholder pressure and a focus on pay for performance remains high priority. There’s a good case to be made that executive pay will stagnate or even reduce in real terms over the next decade.”

PwC’s research shows that companies are tweaking reward packages, rather than undertaking wholesale redesign. Increases in shareholding requirements or holding periods are the most common changes, alongside changes to long-term incentive plans. Five times as many companies are reducing their overall pay opportunity as are increasing it.

Investors’ push for post-vesting holding periods is gaining traction, with the number of companies applying them expected to more than double this year and half of companies expected to comply by 2015.

The research shows that most companies believe the new Department for Business, Innovation and Skills (BIS) pay disclosure rules are a good thing and will help improve trust and transparency in executive pay. But this increased engagement between companies and investors has not translated to an improved quality of engagement with shareholders for most. 60% of companies believe the rules will make it harder to recruit executives from overseas.

Tom Gosling, head of PwC’s reward practice, said:

“The new pay disclosures are a double-edged sword for companies. While they have helped re-build trust in executive pay and increased fairness with the wider workforce, there are concerns that the prescriptive nature of the rules will make it harder for companies to recruit directors from overseas and have not led to improved quality of engagement with shareholders.”

Ends 

Notes

1. PwC’s analysis is based on 43 FTSE100 companies that have year ends from 30th September 2013 onwards, with the majority having a 31st December year end, and where an individual has been in the role for two years or more. This is supplemented by a survey of heads of reward, executive board members, remuneration committee chairmen and HR directors at 34 large companies carried out in February 2014.

2. Tom Gosling is available for interview - please contact Amy Tiernan, media relations manager, Tel: 020 7804 0556.


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