ABI Letter to FTSE 350 Remuneration Committee Chairmen on Executive Director Salary Increases
26 April 2011
The ABI has sent a short letter to FTSE 350 Remuneration Committee Chairmen in relation to executive directors' salaries. In essence, the letter could be construed as a "shot across the bows" of any company that is considering making significant increases to executives' base salaries.
The ABI note the "restraint" applied by many companies over the last few years in relation to base salary increases, evidenced by a large number of companies freezing salaries in 2009 and 2010. However, this salary freeze has "thawed" to a degree in 2011, with our analysis suggesting that salary increases of 2-3% have been quite common in the last pay round, save in companies that continue to struggle more than most in what remain fairly fragile economic conditions.
Indeed, there have been examples of far higher salary increases, and it is perhaps these incidences that the ABI are focussing on (the 2-3% increases appear to have generally been accepted by investors). Therefore, while the ABI state that they will continue to support "well-reasoned" executive remuneration policies and structures that have a "clear link to strategy", they will robustly challenge "unjustified changes, particularly to quantum". In this regard, the ABI will monitor significant salary increases and highlight these to their members where appropriate.
In addition, the ABI re-iterate their belief that executive pay should reflect company performance and must be sensitive to pay and conditions in the business as a whole.
This letter reflects our experience of broader investor discomfort with recent post-downturn increases in pay quantum, whether this be delivered through higher salaries and/or greater annual bonus and/or long-term incentive potential. Remuneration Committees will, therefore, need to bear this in mind when considering how best to incentivise and retain a management team that may have navigated its way through very difficult trading conditions while accepting a pay freeze/moderation, but which is now wanting to pursue a growth path.
Please contact your usual Hewitt New Bridge Street advisers if you would like to discuss the points raised in this briefing.
This update is intended to highlight issues and not be comprehensive, nor provide specific advice. Aon Hewitt Limited does not accept nor assume any responsibility for any consequences arising for any person as a result of them using or relying on the information contained in this update.
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