Executive remuneration flat following new rules

14 May 2015 Consultancy.uk

As a result of new rules, set by companies following shareholder demands, executive pay levels are falling in real terms and more difficult to earn, research by PwC shows. Around half of the companies surveyed did not increase their CEOs salary and almost all adopted an improved link between pay and performance. According to PwC, the new rules are doing the right job; however a period of stability is required for the rules to “bed in.”

A recently released research by professional services firm PwC into executive pay shows that not only are the highest pay levels falling in real terms, they are also getting harder to earn. These results are based on the first 39 FTSE100 remuneration reports of companies with year ends from 30 September 2014 to 31 December 2014.

The research reveals that at the companies surveyed, the median salary increase for CEOs is around 2%, with 45% of CEOs not receiving any increase. This is significantly higher than de 25% in 2014 that did not see their salary increased. Of the 45%, one fifth chose to waive their salary increase themselves.

Head of PwC’s Reward Practice

Improved link between pay and performance
Another issue highlighted by the research, is the improved link between pay and performance, with most companies introducing best practice remuneration structures in response to shareholder demands. Almost all companies (98%) introduced measures to reduce or recover bonuses as well as long term incentive plans (LTIPs) in certain circumstances, known as ‘malus’ and ‘claw back’. 

For the first time after three years of decline, bonus payments to CEOs increased slightly. However, the stricter performance conditions on LTIPs counterbalanced the improved share price performance, with pay-outs falling to less than half (47%) of the maximum award available. As a result the total pay for CEOs including salary, benefits, and all incentive plan pay-outs increased by just 0.7% with a median total pay figure.

Commenting on the results, Tom Gosling, Head of PwC’s Reward Practice, says: “Executive pay is no longer increasing and indeed is falling slightly in real terms. At the same time, pay is getting harder to earn, with almost all companies introducing the ability to claw back bonuses and many lengthening the time executives have to hold onto the shares they get from long-term incentives. Remuneration committees are really raising the bar for executive pay.”

Tom Gosling - Head of Reward Practice PwC

Looking forward, Gosling foresees a similar situation for 2015: “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.”

Gosling concludes by saying: “Over the last few years investor pressure and regulation have led to a significant raising of the bar in executive pay. On the whole 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.”