Exec reward under the microscope in 2009

Executive reward is a key boardroom issue for FTSE 250 companies in 2009 and will impact the ability of companies to weather the economic downturn according to remuneration specialists Hewitt New Bridge Street.

Scrutiny of executive reward structures has been mounting over recent months and a study of directors’ remuneration at FTSE 250 companies carried out by the consultancy shows that remuneration committees are facing a tough balancing act, protecting shareholders’ interests while retaining and motivating the vital executive talent that will be needed to navigate companies through stormy economic waters.

The consultancy’s 2008/2009 FTSE 250 Directors’ Remuneration report reveals that the median total target remuneration of the highest paid directors was £1.3 million in 2008. This represents an increase in total reward of between 7 and 10 per cent year-on-year, which is lower than in previous years.

Executive remuneration packages now typically consist of two major elements – fixed and variable pay. Over the past five years, reward packages have become increasingly performancelinked, comprising around 50 per cent variable pay, such as annual bonuses and long-term incentive plans. In 2003, variable pay comprised less than 40 per cent of total executive reward. Of the variable pay element, this is typically split between annual bonus (45%) and long-term incentives (55%).

It believes that in the current climate the short-term versus long-term split is likely to stimulate much debate. For some companies, long-term target setting may be very hard, it argues, which could provide an argument in favour of increasing bonus potential, albeit with more deferral of bonus into shares. This would provide investors with the comfort that long-term performance is being factored in.

But Hewitt New Bridge Street says that while shareholders are aware of the need for companies to incentivise and retain crucial executives, some investors may need to be persuaded that now is the right time to make major structural changes to the remuneration framework:

Rob Burdett, principal at Hewitt New Bridge Street, which advises over 40 per cent of FTSE 250 companies, says: “As the economy enters recession, remuneration packages are in the spotlight – directors need to be set achievable targets, while investors must be assured that reward levels are not excessive. Other than in some high profile instances, remuneration hasn’t been such a contentious issue for the last couple of years. This is because a degree of consensus emerged on how executive pay packages should be structured, with the largely benign economic environment also helping. However, times have changed, with nearly all our clients now reviewing their remuneration packages.”