35% of FTSE 100 directors see pay rise quicker than performance

More than a third of executive directors at FTSE 100 companies have seen their pay and incentives rise at a quicker pace than company performance, according to new research. The figures highlight a lack of correlation between financial performance and remuneration of executives in many cases.

The study, conducted by Verum Financial Research, used information from company reports and accounts and compared the growth of each FTSE 100 company with the growth in directors’ pay over the fiscal period 2008/09 to 2012/13.

The report concludes that ‘performance exceeded pay’ at 65% of FTSE 100 companies, whilst ‘pay exceeded performance’ at the remaining 35%, according to PRNewswire. The average pay of a FTSE 100 executive director has increased by 13.6% over the research period. This compares to an average pay rise of 2% across all UK employees.

When comparing growth in executive pay and company performance, Centrica, GKN and Severn Trent came out top. Barclays, Lloyds and Smith & Nephew are ranked at the bottom of the index, suggesting that remuneration has far exceeded their performance.

Whilst salaries were increased by 7% over the period, incentive and bonuses increased more significantly, with rises of 14% and 18%. The bonus culture is particularly noticeable in the figures or 2009/10 when overall performance of FTSE 100 companies rose by 2% but bonuses increased by 28%.

Robert Macnab, spokesperson for Verum Financial Research, commented, “From an investor perspective, there is real concern that bonuses and incentives have become detached from performance, that they have become almost part of fixed pay.

“Our research suggests that the metric commonly used by FTSE 100 companies to benchmark director remuneration – total shareholder return (TSR) and earning per share (EPS) – have serious shortcomings. TSR can be influenced by generous dividend policies and EPS can be enhanced by higher borrowings. This goes some way to explaining the ‘ratcheting effect’ in director pay.”

If total executive director pay for all FTSE 100 companies had been benchmarked against the Verum Index, this would have been around 20% higher than the actual figure of £482m in 2011/12.

Macnab added this meant you could argue that directors at the best performing companies were “substantially overpaid” and shareholders towards the bottom of the index “may well have questions for their senior management teams”.

Further reading:

We need to question what bankers are being rewarded for

Survey says City workers predict bonuses will increase 44%

Performance vs. Pay: Should boardroom officials be rewarded regardless of their company’s success?

FTSE 350 directors’ pay rises by 14%

Directors enjoy “platinum-plated” pensions, TUC claims