The median amount paid to FTSE 250 chief executives increased by 11% to £1.8m in 2016, according to Deloitte’s annual FTSE 250 remuneration report. This is in contrast to a fall of 19% (to £3.5m) for chief executives of FTSE 100 companies.
Despite companies making a significant effort to increase transparency on pay outcomes and adopt best practice, voting recommendations and voting outcomes were less positive this year, contrasting with better outcomes for FTSE 100 companies. Of the FTSE 250 companies which have held an AGM so far this year, 15% have received support of less than 80% of shareholders for either the annual remuneration report or the remuneration policy, compared with eight per cent last year.* This compares with nine per cent of FTSE 100 companies in the same position.
However, the Deloitte report also found that FTSE 250 companies have taken significant steps to strengthen the link between executives and the fortunes of shareholders. Over a quarter of companies have increased their shareholding requirements for executive directors for 2017, with 56% of companies now requiring executive directors to hold shares with a value of at least 200 per cent of salary, compared with only 40 per cent of companies doing so last year.
“In the 2017 AGM season, proxy voting recommendations and voting outcomes have demonstrated that shareholders are holding FTSE 250 companies to the same standard as larger FTSE 100 companies” said Mitul Shah, reward partner at Deloitte.
“We have seen many FTSE 250 companies take positive steps in order to meet the expectations of shareholders in terms of how they structure remuneration arrangements. However, for some companies, the outcomes of the 2017 AGM season may have come as a surprise. The cautious and restrained approach taken by many FTSE 100 companies does not appear to have filtered through to all FTSE 250 companies. Shareholders have left this minority of companies in no doubt that the spotlight is also on them.”
Pay opportunities continue to increase
In 2016, the median total single figure received by chief executives rose by over 11% but fell by 4% for finance directors. While the median salary increase remains at around 2%, Deloitte’s analysis suggests that, taking all components of an executive’s pay package together, the total pay package available for maximum performance in 2017 has increased by 7% for the average FTSE 250 chief executive and 5% for finance directors.
There has been no change in median bonus opportunity for FTSE 250 companies compared with last year, remaining at 125% of salary for all executive directors and 150% for CEOs. Twelve companies applied discretion to lower the level of bonus paid, in order to more accurately reflect the performance of the business.
However, FTSE 250 companies are making increasingly large awards to chief executives through long-term incentive plans. The median long-term incentive opportunity for CEOs has increased to 200% of salary, up from 175% in 2016 and 150% in 2015.
By comparison, award levels have remained flat, or decreased slightly, in FTSE 100 companies.
“In recent years, FTSE 250 companies have typically outperformed FTSE 100 companies in terms of shareholder value creation. For example, average share price growth for FTSE 250 companies over the last three to five years have been more than double the equivalent figures for FTSE 100 companies. Nevertheless, it is fair to say that there will be increased scrutiny on pay going forward” added Mitul Shah.
“The key issue remains that of quantum, both in terms of decisions around future opportunity and current pay outcomes, with amounts on offer through long-term incentive plans being a particular cause for concern. Companies should take heed of investor warnings around excessive quantum and take steps to ensure that there is robust and clear rationale behind decisions on opportunity and payouts and that this is communicated effectively to investors. It is also important to recognise that there is broad diversity in the size, complexity and internationality of the companies which constitute the FTSE 250, and that when making comparisons with other companies, great care should be taken to select comparators which are similar in size and nature.”
Best practice has become normal practice
Despite shareholder pushback over levels of pay, FTSE 250 companies have made significant efforts to increase the level of transparency around pay outcomes and adapt packages to meet shareholder expectations. The proportion of companies providing a full range of the financial targets used to determine bonus outcomes, therefore allowing shareholders to more accurately assess whether executives are being stretched, has increased from 48% in 2016 to 59% this year.
Executives are also having to wait longer until they receive their pay, thanks to an increase in the using of holding periods. Deloitte has found that in 51% of long-term plans, no shares will be released for at least a period of five years from award, up from 29% in 2016 and 8 per cent three years ago. More companies are also protecting themselves against rewarding failure, with 78% now having provisions which allow cash bonuses to be clawed back compared with only around half two years ago.
* As announced in the Government’s response to the green paper on corporate governance reform, the Investment Association will publish a register of companies which receive ‘significant opposition’ from shareholders on AGM resolutions. For the purposes of the register, support of less than 80% is considered to be significant.