Spiralling, stagnating or stabilising: What’s the real state of executive pay?

Every year we run a survey into the state of executive pay across the FTSE 100. In the news and reports that surround the General Election, you might get the impression that executive pay continues to spiral out of control. But when we look at the results from our survey, the evidence says otherwise.

Executive pay has stopped increasing.

The early 2015 data shows that the pattern of recent years has become a trend and salary increases are rare. Looking at some of the key pay facts from the report:

  • Of the FTSE 100 executives in our survey, 45% didn’t have a salary increase this year.
  • The average total pay figure received by CEOs rose by just 0.7%.
  • Of the FTSE 100 executives in our survey, 45% didn’t have a salary increase this year.
  • Around 45% of companies froze salaries at current levels, up from 25% in 2014.
  • In one fifth of these cases, CEOs have chosen to waive their salary increase.

At the same time, pay is getting harder to earn.

Most companies have introduced best practice remuneration structures in response to shareholder demand. Almost all companies have introduced the ability to claw back bonuses and many have lengthened the time executives have to hold onto the shares they get from long-term incentives:

  • 98% of companies have introduced measures to reduce or recover bonuses and long term incentive plans.
  • 60% of companies now operate a holding period on their long-term incentive plan, requiring executives to hold shares after they have vested.
  • For the first time in three years, bonus payments to CEOs have increased slightly (by 3%) instead of declining. But the performance conditions on long-term incentive plans have been harder to achieve with pay-outs falling to less than half (47%) of the maximum award available, offsetting improving share price performance.
  • 90% of companies are leaving incentive opportunities unchanged from 2014 levels, so the average maximum pay opportunity for CEOs if they meet all their performance targets is the same as last year.

 Finding the right balance

Over the last few years investor pressure and regulation have led to a significant raising of the bar in executive pay. There’s little sign of executive pay inflation picking up again. Remuneration committees are setting 2015 pay and bonus opportunities at much the same level as last year and 80% of companies are leaving their remuneration policies unchanged. We’re seeing improved disclosure of bonus payments and targets in response to investor demands and investors are now being given a very full picture of the link between pay and performance. There’s no doubt the new voting rules introduced last year have given shareholders more power and helped to bring greater stability to executive pay.

And our research found that investors and non executive directors are content with the new regime. On balance, they believe it’s been beneficial. Where they’ve needed to, investors have used the binding vote on remuneration policy to prevent practices that they consider to be unacceptable. They have the tools they need to do the job of engaging and challenging remuneration committees.

So overall the new system is working and I’d say that the right balance has been struck. Companies can still pay enough to attract talent, but the highest levels of pay are getting tougher to earn, with an improved link between pay and performance. But what’s needed now is a period of stability for the new rules to bed in. Investors and remuneration committees are largely doing their job. They should be left to get on with it.

But the problem remains that, in absolute terms, executive pay is high. And while the post-recession recovery in living standards remains weak, it will continue to be a sensitive area. Our view is that executive pay levels in the UK now largely reflect market forces of supply and demand. We don’t believe there’s a ‘market failure’. But not everyone likes the answer the market’s coming up with. As we’ve talked about before, executive pay is likely to remain constant or fall slightly in real terms for a period of time. But it’s unlikely to fall sharply. For some this won’t be enough. For Remuneration Committee Chairs there's no room for complacency.


Tom Gosling | Head of Reward
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