As highlighted in our article: Early insights from FTSE 100 Directors’ Remuneration Reports - 2024, there has been a lot of debate about how the approach in the UK contributes (or otherwise) to its competitiveness as a place for businesses to list and thrive, one high profile and emotive aspect of which is executive remuneration.
This reporting season marks ten years since the mandatory requirement for single-figure remuneration reporting, under Schedule 8 of the Large and Medium-sized Companies and Groups (Accounts and Reports) Regulations 2008, came into force. Five years later, the 2018 UK Corporate Governance Code (‘Code’) introduced a significant number of additional remuneration-reporting expectations on a “comply or explain” basis. One notable provision was that pension contribution rates for executive directors, or payments in lieu, should be aligned with those available to the wider workforce.
In consideration of the above, we look back at FTSE 100 CEO pay levels and structure and how it has evolved, or not, over the last ten years.
17% increase in salary (~1.5%p.a.)
In the low-inflation, pre-pandemic years, annual increases to ED salaries were typically around 2-2.5%. Many EDs received 0% increases in 2020 and 2021 but, during the last couple of high-inflation years, median increases have risen to 4%. Over the entire period, and recognising the changes to incumbents and index constituents over the years, the increase in the median CEO salary equates to around 1.5% per annum. This demonstrates that, overall, Remuneration Committees have exercised restraint on base salary increases.
Following the 2018 Code’s recommendation that pension benefits for EDs should be in-line with those provided to the wider workforce, we have observed contributions reduce over several years to reach a steady median of around 10% of salary. A handful of companies have taken the opportunity to review and increase their pension provision in recent years, for both the wider workforce and EDs, but this has not yet had an impact on median levels.
10% increase in annual bonus (from 180% to 200% of salary)
50% increase in PSP opportunity (from 200% to 300% of salary)
Maximum bonus opportunities have remained very stable over this period, with the median figure remaining at 180% of salary until 2017, before increasing 11% to 200% of salary in 2018 with no change since. We have observed PSP opportunity levels increase, up from 200% of salary to 300% of salary. The increase we have observed in PSP, compared to the annual bonus, is perhaps no surprise given shareholders would generally prefer an increase to the former given the more direct link the long-term incentive has to shareholder value creation.
Between 2012 and 2018, the drive for simplification from some quarters resulted in a significant reduction in the number of companies operating more than one LTI plan, from just under half to around 10%. Alongside this, the use of deferred bonus match and co-investment share plans has virtually disappeared, share option plans are rare, and – in particular since the pandemic years – we have seen a significant shift away from ‘market-standard’ performance share plans towards restricted share plans. Furthermore, this AGM season, we have observed more openness from the investor community on the adoption of atypical structures and we expect this trend to continue in the years ahead.
5.4% increase in CEO STFR (~0.5% p.a.)
Little change to overall fixed:variable ratio, from 30:70 to 28:72
Shows the typical pay mix in 2014 for CEOs, with fixed pay (comprising salary, pension and benefits) representing around 30% and variable pay (comprising bonus, LTI and other, e.g. SAYE vesting) around 70% of total pay.
Shows the typical pay mix in 2024 for CEOs, with fixed pay (comprising salary, pension and benefits) representing around 28% and variable pay (comprising bonus, LTI and other, e.g. SAYE vesting) around 72% of total pay.
The overall quantum of CEO remuneration has remained stable during the ten years. This perhaps reflects the wider debate circulating in the UK that the culture of restraint, demonstrably observed over the past 10 years, may be hindering some global listed UK companies from attracting suitably qualified Executive Directors from the global talent pool.
Ten years ago, the median target compensation for FTSE 100 CEOs (GBP 2.9m) was below that of S&P 500 CEOs (GBP 5.5m) but a little above that of the S&P 400 (GBP 2.8m), broadly aligned with the relative positioning of each index’s median market capitalisation.
TSR growth over 10 year period: S&P 500: +183%; S&P 400: +122%; FTSE 100 +24%.
Whilst base salaries have evolved at a broadly similar rate across all three indices over the past ten years (+15%-20%), increases in variable pay opportunities in the US indices (target bonus: +15% and +20%; target LTI: +65% and +95% for S&P 500 and 400 respectively) have far outstripped those of the FTSE 100 (target bonus: 0%; target LTI: +30%) leading to the marked difference we see in median target compensation today – GBP 3.7m in FTSE 100, versus GBP 12m and GBP 6.8m in the S&P 500 and 400 respectively.
In addition to quantum, the most significant structural difference between US and UK remuneration packages for CEOs is in the long-term variable element. As outlined above, FTSE 100 LTIs are mostly structured as a single performance share plan, whereas US LTIs typically comprise a combination of performance and restricted shares.
A handful of UK companies have made atypical changes this year to address these challenges and compete globally. These have included significant increases to LTI opportunities and/or the adoption of US-style hybrid LTI plans, comprising both performance and restricted shares. Although some received low votes below 80%, all the resolutions voted on so far have passed and a recent article: The fast-evolving UK executive pay landscape outlines our key learnings supporting FTSE clients making these changes this AGM season. As the debate continues, we expect the UK pay market to continue to evolve at pace and time will tell the impact of these structural and quantum changes over the next ten years.
The Director remuneration in FTSE 100 companies 2024 report provides our final update on the 2024 AGM season, covering key pay developments this year, and sets out an overview of executive and non-executive director market data for companies in the FTSE 100.
