Andersen's annual Directors' Remuneration Report, released this week, highlights the complexity of determining executive pay packages.
Andersen Remuneration Report reveals complexity of determining executive pay
Commenting on the 2001 edition of the report, which studies the remuneration of directors in the top 350 UK companies, Sue Wilson, head of Andersen's Human Capital Practice in Cambridge, said: 'The main themes that emerge are the strengthening of the link between the level of award under long term plans and performance, flexibility in the design of remuneration packages, and an increasing emphasis on executives building up a meaningful shareholding in the company.
'What is apparent from this report is that those responsible for determining levels of executive pay continue to face a rapidly changing and increasingly complex environment.'
The report outlines a number of trends.
Actual bonuses paid to executives during 2000 were typically between 30% and 60% of salary.
Higher grant levels should be seen in the context of tougher performance measures. In a quarter of share option plans only a portion of the options will become exercisable for target or median performance. In order to exercise the full award, performance will need to be significantly above average, typically meaning that the company has to be in the top 25% of a relevant group of companies and in some cases in the top 10%. This is coupled with the fact that, whereas previously directors could exercise their options if performance targets were met over any three year period during the life of the option, performance now tends to be measured over a fixed period and therefore the probability of full vesting is significantly less.
Some companies are reluctant to reduce the notice period for existing directors to 12 months, particularly where they have already been reduced from 36 to 24 months over the past few years. New appointments, however, are often offered notice periods of 12 months or periods that will reduce to 12 months after a longer initial fixed period.
Only 14% of FTSE 100 companies and 12% of FTSE 250 companies have not yet stated their intention to move away from 24 month notice periods. The final report of the Company Law Review suggests that these companies will need to obtain shareholder authorisation to continue with this practice.
Requirements range from 100% of salary to a 500% of salary holding. There has also been an increase in the number of bonus plans where part of the award is paid in deferred shares and plans where executives are required to invest a specified proportion of salary.
If a company achieved on-target performance over a three year period and assuming the share price increased by 10% per annum over the same period, the annual value of the incentive award (annual and longer term) would typically be between 70% and 110% of basic salary, depending on the size of the company. If superior performance were achieved (equivalent to being in the top 25% of comparable companies) and the share price increased by 20% per annum the annual value of the incentive award would typically be 150% of salary in smaller companies and 300% in larger companies.
The main theme that emerges is flexibility in the design of plans, enabling companies to adapt the reward package to fit different needs at different times. This may take the form of allowing higher awards in exceptional circumstances, allowing awards to be made under different plans, and the facility to apply different practices for non-UK participants.
Almost 20% of recent mergers and acquisitions involved non-UK companies. Over 30% of board directors in the top UK companies (in terms of size, complexity and internationality) are non-UK nationals, 70% have at least one US citizen on the board and 30% have at least one executive director based in the US.
Sue Wilson commented: 'Despite cynicism of the mention of 'globalisation' as a justification for high level of rewards, the influence of remuneration levels in other countries, particularly the US, is very real.'
In summary, Sue Wilson adds: 'Overall, we expect the rate of change to continue as the full impact of the current Corporate Governance initiatives takes effect. The role of the remuneration committee is increasingly about balancing the pressures of globalisation, the concerns of shareholders, the complex regulatory environment and the scrutiny of the media. It is set to become harder than ever.'
The Andersen 2001 Directors' Remuneration Report is based on information available in the latest annual reports and accounts of 310 companies representing FTSE 350 companies in June 2001, excluding investment trusts.
The report covers; basic salary levels and increases of over 1,480 full-time executive positions, incentive plan design features, expected value of total compensation, pensions, notice periods, shareholding requirements, change of control provisions, board structure, and non-executive fee levels of 1,660 non-executive positions.
Copies of the full report, price 500, are available from Janet Maskelyne. Tel: 01223 352906
E-mail: firstname.lastname@example.org or visit: www.andersen.com/directorsremuneration.
Further information: Janet Maskelyne, Arthur Andersen, Betjeman House, 104 Hills Road, Cambridge CB2 1LH.
Tel: 01223 353906.
Press information: Jacquie Warner, The Focus Group, William James House, Cowley Road, Cambridge CB4 OWX.
Tel: 01223 426666. Fax: 01223 426662.