Hewitt Associates publishes results of its annual 2010 Eurotop 100 Directors’ Remuneration study

Based on data from the FTSE Eurotop 100 index, the second issue of the study shows that the performance compensation model combining fixed salary and incentive compensation remains very popular. It also shows that the economic downturn began to bite into managers’ pay packets from the end of 2008. In companies that published their salary levels for 2009/2010, for example, the average salary rise for top business leaders was 1.3% against 5.5% in 2008/2009, and over a third of managers had no salary rise. Annual bonuses awarded in 2008/2009 also fell compared to 2007/2008 levels.

Jean Lambrechts, in charge of the managers’ pay scheme recommendations activity at Hewitt France, gave us the following analysis:

“Executive pay hit the headlines in recent months and our data shows that leading European firms reacted by limiting wage rises. The performance-based compensation model works since incentive pay was down by almost a third in a context of falling company profits.”

National specificities

In line with the recommendations on management compensation packages for 2009 published by the European Commission, the study conducted by Hewitt shows that the remuneration policies of the Eurotop 100 index organisations reflected clear national specificities. Basic salaries were lower in Scandinavian countries and France than in Spain, where they were the highest. Annual bonuses represent a larger percentage of overall compensation packages in Germany and Spain, while in the UK and Spain, compensation in the form of share-based options (actions, stock options) is generally higher.

France fits halfway between the two groups, although share-based compensation schemes are generally worth more than annual bonuses.

Jean Lambrechts explained:

“The downturn incited governments, control authorities and investor associations to review their executive pay package recommendations throughout Europe, but to different degrees. While some European countries simply stepped up the existing framework, others, like France and Germany, went further by adopting stricter legislation and governance codes. The systems set up encourage organisations to be more transparent and to put greater emphasis on long-term performance compensation.”

New trends
The Hewitt survey points to the emergence of new trends. When they published their 2009 financial results, some firms announced large bonus payments, even though 2009 profits were down on 2008. This is liable to spark off renewed controversy and re-open the annual bonus debate.

According to Jean Lambrechts,

“A good bonus plan is not just linked to profits. Of course, this is a key factor, but we also have to take other financial and non financial parameters into account that reflect sustainable performance in the widest sense. Bonuses would be more widely accepted if they were combined with longer payment timeframes, possibly awarded as share options and, in some countries, restricted by clawback clauses. However, the most important issue that boards need to focus on is which factors and weighting should be used to calculate bonuses in 2010.”

Main conclusions of the study
Basic salary

The median salary rise for top business leaders in firms that published their 2009 salary levels was 1.3% against 5.5% in the previous year. The average salary of top executives from the Eurotop 100 index companies was almost 1.2 million Euros. The average salary of top finance managers from the Eurotop 100 index companies for 2009/2010 was around 760,000 Euros, and that of other senior executives was around 650,000 Euros.

Annual bonuses

The bonuses that top executives took home in real terms in 2008/2009 amounted to around 100% of their basic salary (i.e. around 70% of the maximum bonus possible, when the figures are available), in other words about a third down compared to 2007/2008. The maximum average annual bonus possible for business leaders corresponds to 180% of the basic salary. For finance directors and other executives, it corresponds to 150% of the salary. Almost a third of the firms planned to implement an annual bonus plan with deferred payments. Only four firms said they had included a clawback clause in their annual bonus plan.

Long-term incentive plans

Most long-term incentive plans implemented by the Eurotop 100 index firms come in the shape of call options (shares, stock options) rather than cash options (only 5 firms opted for the second scheme).

Performance-based call options are now the most common long-term incentive schemes used. They have been adopted by 55 of the Eurotop 100 index firms. 49 companies preferred stock-options, generally linked to performance targets, as against 53 in 2008. 17 of the firms have introduced schemes that encourage company executives to buy into the company in order to benefit from a share attribution plan. The estimated average value of long-term incentive plans used by managers in the Eurotop 100 index firms amounts to 154% of the salary, globally worth a share performance attribution with a nominal value of 280% of their basic salary. Earnings per Share (EPS) and Total Shareholder Return (TSR) remain the most commonly used performance indicators in long-term incentive plans. In most cases, compensation in the form of capital is subject to performance conditions, including stock option plans.

Cash bonus schemes

The average cash bonus for top executives who reached their targets was around 4.4 million Euros. For finance directors and other executives, it was around 2.9 and 2.5 million Euros respectively.

Pension plans

The type of pension plan and the level of benefits offered depends to a large extent on local legislation and on local tax systems. In countries like the UK, pension plans with defined benefit plans are rapidly losing ground to defined contribution plans. In other countries like France and Germany, defined benefit pension plans are still the most widespread. The 2010 Eurotop 100 Directors’ Remuneration index analysed remuneration levels in companies from the FTSE Eurotop 100 index (composition in August 2009), looking at the overall level of remuneration and the weighting of the different elements.

For more information on the FTSE Eurotop 100 index: http://www.ftse.com/Indices/FTSE_European_Index_Series /Constituents.jsp