FTSE chiefs earn £3.1m a year despite recession

Recession or not, the UK's top executives are still earning a typical £3.1m a year each – with a "poor correlation" between their pay and shareholder value, according to two of the country's leading authorities in the field. The level of remuneration will fuel the debate about boardroom excesses, with a crucial vote on pay at Marks & Spencer due next week. Shell and Tesco are two of the other leading British companies that have suffered from adverse publicity about "fat cattery". MM&K, a business consultancy, and Manifest, which advises institutional investors on how to vote at corporate AGMs, say that the typical pay of a FTSE-100 boss rose by 5 per cent since the slump began in 2008.

This contrasts with the pay of many private-sector staff further down the organisations they lead who have agreed to minimal pay rises or to pay freezes to help preserve jobs and the future of their companies.

There is also an embarrassing comparison with earnings per share for these companies – down 1 per cent over the same period. Looking over a ten-year horizon, the researchers found that despite widespread share-price declines, CEO remuneration has quadrupled.

Most striking of all is the rise of the shorter-term bonus as a method of incentivising directors, ironically just as it is being punished in the banking sector for causing such damage. Such bonuses now amount to a potential 300 per cent of salary.

The survey shows that chief executives of larger companies are the "clear winners in the remuneration race", now enjoying up to 300 per cent of their salaries as annual bonuses compared with CEOs in smaller organisations (with a £100m to £1bn market capitalisation) where bonuses are typically capped at a still-healthy 100 per cent. For larger companies, maximum bonus levels as a proportion of their salaries are about 25 per cent higher than in 2006 – and their salaries are 16 per cent higher too.

Commenting on the findings, Cliff Weight, director of MM&K, said: "Many performance-related pay schemes appear designed to satisfy the CEO and in fact offer little incentive for anything above just 'adequate' performance. If this wasn't bad enough, we found most strategies were not based on adequate benchmarking meaning and many committees replicated the errors of their peers.

If committees want to avoid criticism at the AGM and look shareholders in the eye, they've got to change and be more diligent and challenging. The key determinants of a successful incentive remuneration strategy revolve around choosing the right blend of short and long-term performance criteria together with rigour and toughness in the target setting."

The survey also identifies a shift from longer-term incentives, typically over three years, to annual bonuses, mirroring the approach that caused so many problems in the banking sector. Furthermore, as most remuneration strategies now involve the use of Long Term Incentive Plans (LTIPS), reward horizons have shortened to only three years. A decade ago, when share options were the favoured long-term incentive, the horizon average was seven to ten years.

What they call "management myopia" is "accentuated among larger companies whose complex schemes contain multiple reward thresholds". This means that the typical CEO enjoys rewards for even the most basic levels of performance regardless of whether they attain an "exceptional" outcome for the company with many requiring a modest earnings-per-share growth of RPI plus 8 per cent to vest the maximum award.

Despite almost two decades of attempts to reform boardroom practice from the 1992 Cadbury Report onwards, the role and performance of remuneration committees remain unsatisfactory, according to this latest evidence.

A spokesman for MM&K and Manifest added: "Remuneration committees are struggling to maintain their independence from their chief executives and are adopting increasingly expensive, short-term reward strategies. Far from behaving as a truly independent body, many remuneration committees have been unwilling to challenge their directors on behalf of shareholders and have become captives to the internal views of management."