Stewardship code gives shareholders a say over pay

In the wake of the world financial crisis, executive remuneration has become an explosive issue, not least for finance directors. After all, FDs are the custodians of the financial health of their business and when things go wrong, how they are remunerated naturally comes under the microscope.

Twelve months ago, the world was in the grip of the worst recession in memory, with the remuneration of senior executives subject to intense media scrutiny.

FTSE-100 FDs’ take-home pay fell for the second time in a row, and FTSE-250 FDs suffered a near-30 percent drop in bonus payouts.

The UK has officially come out of recession and, as confidence appears to be waiting in the wings, this has been reflected in the remuneration of FDs. According to Financial Director’s latest salary survey, FTSE-100 FDs have returned to all-time highs.

After the backward step of 2008, in 2009 the total pay of FTSE-100 FDs saw an 11.7 percent increase, helped by a 27.3 percent increase in bonus payments. FTSE-250 FDs experienced a slightly smaller 23.3 percent increase in bonus payments.

According to Deloitte’s latest report on executive director remuneration, awards are more likely to be at usual levels in 2010. Bonus payouts, which in 2009 were lower than previous years, also appear to be back at more typical levels in 2010.

Although this may prompt some commentators to suggest that remuneration for executives is very much business as usual, some elements have clearly changed.

“I don’t think remuneration structures have changed for good, but neither is it a case of reverting to business as usual,” says Colin Melvin, chief executive of Hermes Equity Ownership Services.

“What has changed is the quality of interaction between shareholder and company. That is good for FDs because they get proper support and challenge from their long-term shareholders.”

Executive remuneration continues to hit the headlines and in recent months there has been a great deal of noise about shareholder activism, with suggestions that shareholders would be flexing their muscles in the 2010 AGM season.

Shareholder revolt
This was the case with Cable & Wireless (C&W), which faced a shareholder revolt in March this year over a controversial incentive scheme that put three executives in line for millions of pounds if targets were met. Last year, C&W also suffered a shareholder rebellion when 38 percent of its investors failed to endorse its renumeration report after the Association of British Insurers objected to it.