UK - There has been a step-change in the levels of directors' pay and incentives at FTSE100 companies, with base salaries for executive directors rising by 12.8% in 2001, according to Pensions Investment Research Consultants' (PIRC) latest corporate governance review.
The review analyses corporate governance structures, remuneration packages and proxy voting among 547 of the UK’s largest companies.
Another notable discovery is that most companies have changed to making annual share option awards based on a multiple of base salary, most often awarding options worth two times salary per year.
Commenting on the share option awards, PIRC research director Stuart Bell said: “Basing share awards on ever-increasing annual salary creates a powerful multiplier effect which has the potential to create a boardroom pay explosion in the coming years.
“Directors’ pay will soon have to be approved by shareholders at AGMs so they will have a powerful new tool to hold directors accountable. The question is whether and how this tool will be used”.
Other findings include:
-Of the 51 voting amendments which increased the level of awards which may be made to participants, only 24% incorporated a strengthening of performance targets to balance the increased rewards.
-Average executive director salaries have risen by 3.4% in the MidCap and 5.4% in the SmallCap sector. Including cash bonuses and benefits, average total cash remuneration increased by 20.2% in the FTSE100, by 10.2% in the MidCap and by 0.2% in the SmallCap.
-Only 28% of companies state that they fully comply with all the corporate governance code’s provisions. PIRC’s assessment is that 20% of companies comply.
-Only 65% of companies have a contracts policy of no longer than one year (up from 57%), and 81% have a fully independent remuneration committee (up from 74%).
-Only 88% companies separate their chairman and chief executive roles. 84% do not have three non-executives comprising at least a third of the board, a majority of whom are independent.
-7% of PIRC’s sample contain no independent directors, using the body’s assessment of independence. Looking at independence among non-executives, only 65% of companies have a majority of independent directors among their non-executive directors.
-After several stable years, average audit fees increased by 25% in the FTSE100.
-Non-audit fees grew by 35% in the FTSE100 and 27% in the MidCap. Within the FTSE100, the average company pays 2.8 times more in non-audit fees than in audit. Ratios of audit to non-audit fees are lower among smaller companies but have also shown significant growth.
-In terms of proxy voting, 51.4% of shares voted on average in the FTSE All Share Index. -Voting turnout at FTSE350 companies was slightly worse at 49%. Eleven FTSE100 companies had turnouts of less than 40% and three registered turnouts of less than 20%.
-Half of the resolutions with the largest oppose votes related either to share option schemes, directors’ contracts, remuneration policy or other pay issues.
PIRC MD Alan MacDougall, said “We detect an increase in activism among those institutions that do vote and a deepening frustration about levels of boardroom pay. This issue seems set to dominate next year’s annual meetings once again”.
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