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OPINION

The key trends in executive pay

The key trends in executive pay
May 5, 2022
The key trends in executive pay

Unlike last year, when the salaries of about half the FTSE 100 chief executives were frozen, over four-fifths of those surveyed have received an increase. The pay constraint last year was hardly surprising, considering that lockdowns were slowing the economy when salaries were reviewed, and that inflation was so low. The median of the increases decided for 2022 was about 3 per cent, broadly in line with inflation at the time, but never forget that companies as a group are far from monolithic – there are variations between each because each has different characteristics and each faces different challenges. “Of those companies disclosing wider workforce increases,” PwC says, “59 per cent are awarding the chief executive an increase in line with the wider workforce, whereas 36 per cent are awarding an increase below that of the wider workforce”, suggesting that two of the 50 companies had awarded higher rises.

That’s all very well, but salaries are only a small proportion of the amount that chief executives can receive each year, so what about pay for performance? In short, it was much higher. In 2020, 28 per cent of FTSE 100 companies paid no annual bonus, and bonuses were constrained by performance targets that had mostly been set before the pandemic. The lockdowns generally hampered performance, and those companies that received government support or cancelled their dividend came under pressure to peg salaries and cancel bonuses. So you might have expected some sort of a bounce back last year, and indeed, with one exception, every chief executive in the 50 companies surveyed received a bonus. What’s more, the amounts were higher. The median of 82 per cent (of the maximum they could have received) was not only more than in 2020 (when the median was 44 per cent), but higher than in the most recent pre-pandemic years. The reason for this goes back to the uncertainty when performance targets were being set for 2021. Nobody could say then when lockdowns would end, nor what would happen afterwards, so remuneration committees tended to set conservative targets. When lockdown restrictions eased, pent-up demand returned faster than expected, which boosted revenues and profits. That lifted performances against targets. And bonuses.

A major change is that about 40 per cent of FTSE 100 companies have adopted environmental and social measures as performance conditions. Decarbonisation, energy reduction, diversity, inclusion and health and safety are the main ones. PwC attributes this trend to “stakeholder pressure”, by which it presumably means that remuneration committees have responded to concerns raised by fund managers.

When it comes to the long-term performance, the pay picture becomes starker. The performance assessed in 2021 would mostly have been based on measures set in 2018, and those three intervening years, to say the least, saw a lot of variation. The first year was pre-pandemic, so could be regarded as being normal (or at least, the old normal); the second one saw activity curtailed by lockdowns; and by the third, in 2021, the external background might still have been mixed, but many businesses were experiencing that greater-than-expected boost to performance. Also, the FTSE 100 was on an upward trajectory, and since these long-term awards are denominated in shares, for many companies share price gains made the awards more lucrative.

To take one example of this gearing effect, the chief executive of Diageo (DGE), Ivan Mendez, received 29 per cent of his 2018 share award in 2021, and 10 per cent of his options. The previous year he received 7 per cent of his shares and 27.5 per cent of his options. In the meantime, Diageo’s share price had risen by 40 per cent, which leveraged up the value of his awards considerably. On the day that he could receive them in 2021, his 2018 awards were worth £1,975,000; those of the previous year had been valued at £584,000.

As for the future, PwC says that a dozen of the 50 companies surveyed put forward new pay policies, of which five wished to make more generous share awards. That dangles a carrot (since the maximum potential outcomes are unlikely to be achieved), which you can read in two ways: a response to skills shortages at executive levels, or merely another example of the rich possibly getting richer? Or maybe both. But many of these proposals were devised against a backdrop of rising share prices, since when circumstances have changed. The environmental threat looms as large as ever, but geopolitical threats have increased, and who knows where markets are going. The art in setting pay policies and targets, like owning shares, is in positioning them against risk. You can never tell how events will pan out.