Bonuses for the directors of the UK’s biggest companies rose sharply this year after a rebound in share prices and corporate earnings exceeded 2009 performance targets tailored for a bleaker economic environment.
Bonuses for the highest FTSE 100 company directors rose to an average of about 120 per cent of base salary compared with 90 per cent in the last financial year, according to a report from Hewitt New Bridge Street, a remuneration consultancy.
The rise in bonuses coincided with the number of blue-chip companies freezing executive directors’ salaries – which fell from 60 per cent last year to 33 per cent this year – with the average base salary for the highest paid directors rising from £800,000 ($1.3m) to £823,000.
The report argues the high level of bonuses was not simply a result of deliberately low performance targets, but because of a market and trading recovery that was beyond the expectations of executives and investors when remuneration levels were set last year.
“Our experience suggested that when these targets were set in early 2009 they were actually set to be tougher relative to budgets, in order to take into account of possible reduced profits,” said Rob Burdett, a principal consultant at Hewitt.
Bonus levels in absolute terms were the highest in the eight-year history of the survey, with average total pay of a FTSE 100 chief executive up 65 per cent in seven years compared with a 50 per cent increase in the blue-chip index over that period.
About 65 per cent of large-cap companies now require bonuses to be paid in shares, up from 60 per cent last year.
The rise in FTSE 100 director bonuses relative to their base salaries has not so far been met by a marked rise in investor action against high remuneration, indicating shareholders have been more accepting of companies’ explanations.
Last year investors rebelled against director pay packages of several high-profile companies such as Marks and Spencer and ITV.
But the recent Stewardship Code published by the Financial Reporting Council requires investors to publish their voting policy, which industry observers believe could increase shareholder action on remuneration issues.
“The link between pay and performance was much harder to prove last year, as the situation was more opaque than compared to now,” said James Upton, assistant director of investment at the Association of British Insurers, which represents a fifth of UK institutional investors.