November 6, 2012 12:01 am

Rebellion reins in directors’ pay deals

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Angela Ahrendts, chief executive of Burberry©Bloomberg

Angela Ahrendts, chief executive of Burberry

FTSE 100 directors’ median pay rose by 10 per cent last year – more than six times the increase in overall average earnings – despite a sharp slowdown in basic pay and bonuses, a report has found.

Research by Incomes Data Services, the pay monitoring group, suggests that this year’s shareholder rebellion against excessive pay packages has helped to rein in salary and bonus increases.

However, a big rise in the value of vested long-term incentive plans (LTIPs) – share-based schemes linked to shareholder returns – meant directors’ total earnings still increased markedly .

The median increase, the halfway point between the largest and smallest rise, was 10 per cent in 2011-12, down from 16 per cent the previous year.

But the average rise was 27 per cent, down from 49 per cent. That occurred at a time when average earnings across the economy grew by 1.6 per cent.

The median total pay of FTSE 100 chief executives was £3.2m, while the average was £4m.

Since 2000, FTSE chief executives’ total pay has gone up by 266 per cent, according to IDS, while the corresponding rise in whole economy earnings was about 40 per cent.

“Whether a reaction to government pressure, shareholder concerns or a worse than expected business environment, it seems the brakes have been applied to the basic pay growth for FTSE 100 bosses,” said Steve Tatton, editor of IDS’s Directors Pay Report.

“However, while shareholders will be pleased to see more traditional elements of pay seemingly slowing, these figures show that directors’ earnings can still grow significantly as a result of a complex mix of incentives.”

Change in median earnings of executives

Angry shareholders have claimed a number of victories over pay this year, including a rebellion against WPP chief executive Sir Martin Sorrell and the resignation of Trinity Mirror chief executive Sly Bailey.

Vince Cable, business secretary, has pledged reforms from next October including giving shareholders a binding vote on future pay policy every three years.

IDS said FTSE 100 directors’ salaries increased by a median of 3.5 per cent, while the value of bonus payments fell by 4.9 per cent.

But the median value of LTIPs grew by 81 per cent to nearly £940,000. For chief executives, the value of vested LTIPs reached £1.6m.

Top of the FTSE 350 league

Angela Ahrendts

Angela Ahrendts, chief executive, Burberry (pictured): £15.9m

Sir Martin Sorrell, chief executive, WPP: £14.3m

Peter Voser, chief executive, Royal Dutch Shell: £10.4m

Bob Diamond, former chief executive, Barclays: £9.98m

Pay figures are for the year 2011-12. Some figures have been converted from foreign currencies, and exclude donations to charity.

Source: IDS Executive Compensation Review

LTIPs are designed to incentivise directors over a long-term period, typically three years. They are usually granted in the form of shares and are closely linked to shareholder returns.

Mr Tatton said many LTIPs were based on comparative performance with competitors, meaning directors stand to gain even if their company’s performance has worsened – as long as their chosen peer group has done even worse.

The maximum value of share grants has been steadily increasing. When equity prices were low, as in 2008 and 2009, directors were allocated a large block of shares. Share prices have subsequently risen, bringing windfall gains.

The top earner among FTSE 350 bosses was Angela Ahrendts, chief executive of Burberry, the luxury fashion brand, with £15.9m, followed by WPP’s Sir Martin Sorrell (£14.3m).

Brendan Barber, general secretary of the Trades Union Congress, said: “Directors have proved that executive pay structures are not fit for purpose by securing another huge earnings boost, even while ordinary workers suffer flat or even falling wages.”

Deborah Hargreaves, director of the High Pay Centre think-tank, said the gap between rewards in the boardroom and those for the rest of society had opened up to unsustainable levels.

Dave Prentis, general secretary of Unison, the public sector union, said: “It is time to close that gap by bringing the minimum wage into line with the living wage. It is clearly ridiculous that taxpayers are landed with a bill of between £6bn and £7bn a year for in-work benefits because scrooge bosses are lining their own pockets.”

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