Bonus payments for UK main board executives rose significantly over the last year, while their salaries fell in real terms as increases lagged behind inflation.
A report by global management consultancy Hay Group reveals that the fall in their real salaries is among the biggest in Europe – with only Norwegian executives faring worse.
However, their total cash remuneration - a combination of base salary and annual bonus - rose significantly overall.
The Hay Group report, Top Executive Compensation in Europe, examines data for 257 companies from the FT Europe 500, spanning 11 countries. The study highlights the effects of economic and other pressures on executive pay over the past 12 months.
Simon Garrett, Director of Executive Reward at Hay Group, said: “Many expected the banking crisis and recession to prompt a fundamental shift in top executive pay. But in reality, most changes have been incremental and cautious.”
Real Salary Falls
Base salaries for top executives have largely stagnated across Europe, with UK main board executives seeing a marginal increase of 0.9%, to a median of £630,000 per annum.
However, an inflation rate of 2.8% has undermined this rise, resulting in a fall in real terms of 1.9% - one of the highest drops in Europe.
Only Norway ranks lower, where executive salaries have fallen by 2.7% in real terms.
Top Executive Compensation in Europe: Salary Change in Real Terms
Country - Real Terms Pay Change 2009-10
- Switzerland - 1.1%
- Spain - 1%
- Russia - 1%
- Belgium - 0.1%
- Netherlands - 1%
- Germany - 1.1%
- Sweden - 1.2%
- Italy - 1.4%
- France - 1.7%
- United Kingdom - 1.9%
- Norway - 2.7%
- EU median - 1.2%
Bonuses Bounce Back
Despite falling in value during the crisis, annual bonuses have proved resilient as European economies have emerged from recession.
The median bonus paid to UK main board executives stands at £714,000. When looking at roles that were in both the 2009 and 2010 studies, bonuses have increased 17% on last year.
Total cash remuneration - a combination of base salary and annual bonuses – rose by 14% overall, jointly the 4th highest increase of the countries studied.
According to Hay Group, rising bonuses are being driven by the need to reduce performance targets in difficult market conditions, to ensure annual bonuses continue to motivate executives.
Simon Garrett said: “Many companies revised performance targets downwards in tough times – without reducing the amounts payable for on-target performance in many cases. Corporate performance for many has turned out to be better than expected and achievement of these targets has therefore seen bonus payouts recover to pre-recession levels. We believe that this situation highlights the failure of many Remuneration Committees to tackle the issue of cyclicality in bonus plan designs.”
Long-Term Incentives
The report reveals that while long-term incentives (typically share-based rewards, such as share options) continue to make up a substantial part of executive pay in the UK and across Europe, companies have reigned in the value of these awards over the last year.
According to Hay Group, this fall may reflect shareholder unease over the use of share programmes in volatile markets and pressure to scale back their use.
Simon Garrett said: “Many shareholders have argued, with some success, that continuing to make long-term incentive awards of the same value could result in a windfall. If an award is made when the share price is depressed, and it later recovers to ‘normal’ levels, the executive makes an undeserved profit. It seems as though many companies have taken this message to heart.”
Conclusion
The report sounds a warning for corporate remuneration committees and the boards of Europe’s largest firms.
Simon Garrett said: “We believe that, now more than ever, remuneration committees need a clear understanding of the interaction between reward and corporate strategy, and the value gained from compensation paid to top executives. Without this, a sustainable long-term approach to executive compensation cannot succeed.
“Boards now have no choice but to treat executive pay as a strategic tool if they want to excel in an increasingly competitive market.”
