The kids are back at school, the leaves are turning and we saw the first frost recently – all of which means you will probably soon be starting pay review – if you haven’t already. Wading through reams of pay data while trying to keep up to date with market trends can seem daunting. To make sure your grades don’t slip (!), we’ve pulled together a cheat-sheet based on our Willis Towers Watson 2017 UK Executive Survey (containing over 230 companies from 35 industries – a mixture primarily of UK listed firms and UK subsidiaries of overseas corporations). Happy studying.
Base salary increases have been the lowest in the last seven years…
Median base salary increases this year have been the lowest since 2009-2010 at all executive reporting levels.
Figure 1. Median base salary increases over time
… and median actual bonus awards have fallen closer to target levels
Median actual 2017 bonus paid outs have been close to target in most cases, whereas median pay outs were above target in 2016 for all levels by at least 6%. Is this a sign that companies have been doing their homework and target setting is improving, or was 2017 just a ‘hard’ year? Probably a combination of the two – and we expect the focus on target setting in particular to continue next year.
Figure 2. Median actual, target and maximum bonus levels
Many companies pushed bonus deferral down below the main board
Approximately 80% of companies in the FTSE 350 operate a deferred bonus plan for Executive Directors (only 4% offer an additional matching award, reflecting the near-total shift away from old-style deferred-bonus LTI plans towards simple bonus deferral). For CEOs, median compulsory bonus deferral is 50% and the proportion remains substantial at lower reporting levels. Clearly, companies are attempting to extend the long-term mind set and risk-control ethos across all executive levels.
Figure 3. Proportion of bonus deferral by reporting level
Performance share plans remain the most common long-term incentive vehicle
Most companies in the FTSE 350 operate a single long-term incentive plan with two performance conditions to be met for awards to vest. The top three measures of performance in 2017 are TSR, EPS and return-on measures.
Very few companies use restricted stock at Executive Director level (as we have reported in previous issues – the increase many expected this year never happened) but at lower levels, the use of restricted stock increases as line of sight to company financial metrics reduces. The use of stock options remains rare; where they are used, it is often by companies with a significant presence in the US.
Figure 4. LTI receivership by plan type and by reporting level
And finally, pay mix remains stable
Although there has been some rebalancing between long- and short-term incentives, the ultimate split between fixed and variable pay has remained fairly consistent.
- The proportion of target total remuneration based on variable pay continues to increase with seniority;
- At CEO/ Executive Chairman level, over 40% of target total remuneration is delivered through LTI, and 27% through STI;
- The proportion of target total remuneration delivered through LTI reduces at Executive Committee level and the proportion delivered through base salary increases; and
- Executives reporting to the CEO but not on the ExCo, and those at reporting level three have quite similar pay mix, with at least 50% of target total remuneration at median delivered through base salary.
Figure 5. Target total remuneration pay mix
Willis Towers Watson’s view
So, the overall picture is of:
- Slow base salary growth, reflecting a combination of continued external scrutiny and resulting conservativism, and ongoing sluggish productivity growth;
- Lower bonus outcomes – albeit closer to target where they ‘should’ be in aggregate and on average if target setting is working correctly;
- More meaningful bonus deferral at lower executive levels; and
- Little change to LTIs or to overall pay mix.
As the broader external environment remains highly uncertain, it may be somewhat comforting to some to see that at least the executive pay landscape has not changed dramatically in the last year! The regulatory climate in particular is not getting any easier and pressure to play by the book has never been stronger. Initiatives such as the Government’s Corporate Governance White Paper have prompted – and will continue to prompt – unprecedented external scrutiny. And proxy advisors, investors and their representative bodies remain highly engaged.
All of which suggests we may be heading towards another conservative year in 2018. But who knows – it is getting tougher to call things these days so we can only suggest that you watch this space. In the meantime, as you head towards pay review this month we hope we have helped you avoid a red cross next to your name for this subject.
If you are interested in purchasing the 2017 Executive Survey please contact Hazel Rees for further information.