Large firms must ensure bonuses for directors are truly earned

BIG companies in the UK must do more to justify the link between big bonuses for directors and performance, a report out today claims.

In its annual executive directors’ remuneration report, Deloitte says that despite seeing some positive steps to improve executive pay structures, “more should be done” by FTSE 350 firms to justify the link between annual bonuses and performance delivered to shareholders.

The report argues that base salary increases for executives should be limited to those of the general population and adds that some “hard thinking” should be done around bonuses.

The report comes after recent research by the High Pay Commission, which found that average bonuses for top company directors had increased by almost 200 per cent in the past decade despite falling share prices.

Stephen Cahill of Deloitte said: “While there have been positive changes, such as the trend towards more deferral and retention of shares and the increase in clawback provisions, we are also seeing above-target annual bonus payouts on a regular basis.

“Remuneration committees need to remain vigilant and ensure that remuneration is fair and reasonable from a participant’s and shareholder’s perspective.”

Most large firms have raised salaries on average 4 per cent or less this year, the report said. The authors were surprised by the number of salary increases above 5 per cent, which is “significantly” above both inflation and the increase in average employee earnings.

Deloitte said companies should ensure base salary increases for executives were limited to those of the general population.

“Remuneration committees should consider increasing salaries only where there is a real and compelling reason to do so and any increases should be limited to the general level of increase for other employees, unless exceptional circumstances exist.

“If director salaries are currently above market median then the remuneration committees should consider implementing a pay freeze in order to exhibit restraint in these difficult times.”

The report added that as well as limiting salaries, remuneration committees should acknowledge that paying target bonuses requires genuinely good performance when setting the annual bonus targets.

“For bonuses in excess of this amount, truly stretching performance should have been achieved,” it said.

The report finds that the maximum amount of potential bonuses for FTSE 100 or FTSE 250 executive directors remained constant at 150 per cent and 100 per cent of salary, respectively. However, bonus payouts increased during the year from 71 per cent of maximum to 87 per cent for FTSE 100 companies, and from 54 per cent of maximum to 86 per cent for FTSE 250 firms.

Cahill added: “Annual bonus plans are an area where some hard thinking should be done. There is a very strong argument for a recalibration of both targets and expectations to ensure that these payouts do not, in effect, become almost guaranteed.”