Está en la página 1de 16

Reward aligned with

strategy
Top executive compensation in Europe 2011

Fixed pay stagnated and bonus payments rose in 2011, as companies strengthened links between pay and performance. More than ever, companies need to tailor pay packages to their own unique circumstances, or risk executive pay being determined by an increasingly temperamental market.

www.haygroup.com

This is a summary of the key trends and developments in European executive pay over the past 12 months, as identified in Hay Groups Top executive compensation in Europe 2011. Top executive compensation in Europe 2011 is the most comprehensive study of European executive rewards available today. It analyses compensation data from 312 European companies drawn from the Financial Times Europe 500, providing the competitive context and top-quality analysis needed to make informed executive decisions. For more information, about the report please speak to your local Hay Group contact.

Key trends

Return on reward investment The recession has introduced a greater degree of discipline into executive pay.
In boom markets, many companies were driven almost exclusively by a concern for the competitiveness of their pay package. There is now an emerging focus on return-on-investment in reward, with companies looking to tie executive packages more explicitly to the value they generate. This is reflected in this years study, with companies taking a cautious approach on base salaries. Executives are instead being rewarded for improvements in business performance through variable pay, with rises and falls in total compensation over the past year driven almost entirely by short- and long-term incentive awards.

Companies are taking a cautious approach

on base salaries.

4 Top executive compensation in Europe 2011

Room to move? High levels of scrutiny of executive pay have now become entrenched, particularly in the mature markets and the banking sector.
Regulation and shareholder activism across Europe have meant that remuneration committees are being asked to demonstrate how reward decisions and performance metrics relate to the long-term interests of the company and its shareholders. As a result, many companies have had to modify their compensation decisions in order to meet new regulatory requirements and are spending much more time and effort explaining the rationale of their decisions to a far wider audience than before. Some countries, such as Germany and Italy, have been so swamped by regulation that they have become preoccupied with meeting it. The result is that many companies across Europe are concentrating on compliance at the expense of strategy. Those who do look for an innovative solution can find their efforts ill-appreciated. Pressure has, for example, been mounting from shareholders of UK companies to take less of a one size fits all approach to executive remuneration matters. This has resulted in a small increase in the number of companies taking unusual, new or tailored arrangements to investors. Having done as shareholders requested, some remuneration committees have been dismayed to discover that investors can be highly sceptical of such unfamiliar arrangements.

2011 Hay Group. All rights reserved

www.haygroup.com

The risks of pay-at-risk The volatility of short-term incentive payouts has increased significantly over the past three years.
This appears to be driven by increased volatility in sector performance, as variations are clearly marked by sector. We believe this trend is likely to continue as market conditions remain fluid, making it difficult for remuneration committees to predict performance outcomes. A greater proportion of variable pay results in a higher degree of uncertainty around total compensation, for both employer and executive. In a volatile and depressed market, companies have to find a way to balance between ensuring that pay reflects corporate performance which may be affected by things beyond the executives control and still remains competitive, in order to attract and retain the executive talent needed. As the importance of equity incentives continues to increase (they now make up 33 per cent of total direct compensation, compared to 25 per cent last year), companies will also have to deal with the inherent volatility of these instruments. The appeal of these plans is that the share price acts as a built-in performance measure, aligning the interests of executives with those of shareholders. However, increased volatility in the general market will lead to gains and losses unconnected to corporate performance. This is often a difficult outcome to sell to stakeholders, and (in the case of losses) to the executives themselves. It is therefore all the more critical that equity incentives be agreed as part of a coherent executive remuneration strategy, and the potential for windfalls and losses accepted by employees and stakeholders as the price to be paid for tying executive pay to share performance.

6 Top executive compensation in Europe 2011

The picture in 2011


As austerity measures continue to bite across much of Europe, base salaries remain largely stagnant. Base salary
Table 1: Year on year per cent growth in base salary

Percentage

5 4 3 2 1 0 The Netherlands France Germany Italy Switzerland

Europe Europe

Percentage

5 4

Europe The highest fixed pay rises were seen in Germany, which saw a 4.2 per cent increase in base salaries, due in part to new regulations on sustainable pay that have restricted 2 110 bonuses, and in part to the relatively good performance of the German economy. 1 Europe In contrast, French base salaries did not grow at all. French companies agreed to a 100 code of conduct in 2008 that recommends increases in top executive base salaries 0 at relatively long maturities, such as three years. Given the level of scrutiny around 90 executive pay, few companies are willing to go outside the codes provisions and this is likely to be depressing French salary increases. France France Germany Germany Italy Italy Switzerland Switzerland The Netherlands The Netherlands UK UK

Percentage

3 120

Table 2: Base salary as per cent of European median

Percentage

120 110 100 90 France Germany Italy Switzerland The Netherlands UK


Europe Europe

2011 Hay Group. All rights reserved

UK

www.haygroup.com

In Italy, salaries were effectively flat, with executives receiving only a 0.2 per cent increase. Italian companies have been hit with greater regulation and disclosure requirements, and have also seen a surge in shareholder activism with greater numbers of board directors being nominated by institutional investors. This has combined with a general austerity due to a depressed market, making significant fixed pay increases effectively untenable for many.

Table 3: Base salary increases vs GDP and inflation all executives 5 4.5 4 3.5 3 2.5 2 1.5 1 0.5 0 Europe France Germany Italy The Netherlands Switzerland UK GDP In ation Base salary

8 Top executive compensation in Europe 2011

Short-term incentive payouts against target


Our survey indicates that 60 per cent of executives Europe-wide were paid as much or more than their target bonus amount, and 40 per cent were paid less. The UK, Belgium and Germany performed particularly strongly, with 79 per cent of executives in the UK receiving more than their target bonus, 72 per cent in Belgium and 71 per cent in Germany. In contrast, only 39 per cent of executives in France received their target bonus or more. The spread of payouts was wide, reflecting a volatile market. One quarter of executives received 142 per cent or more of their target bonus, while a quarter received 91 per cent or less. The median payout was 111 per cent of target, reflecting the overall improvement in market performance across Europe.

Banks defer incentive payouts The banking sector has seen particularly close scrutiny around incentive payments. A consequence of this has been an increase in deferred bonus plans and claw back provisions. Seventy two per cent of banks covered by the study now use deferred bonuses, compared to only 44 per cent last year. The mandatory amount deferred ranged between 50 per cent to 100 per cent of the short-term incentive award. This development reflects an increased emphasis on the long term, in part in response to regulation and in part because of stakeholder concerns about the use of short-term incentives. Political pressure on executive bonuses in banking remains high in The Netherlands, for example, there have been demands for the government to retroactively tax bonuses paid since 2008.

Total cash
Median total cash (base salary plus short-term incentive payment) increased in all countries, with much of those increases coming from bonus payments. The results generally track the performance of those country markets, with French and Italian executives once again seeing the smallest rises. The most significant rise in bonuses came from Switzerland, where executives received little or no base salary increase, but a 12.5 per cent median increase in total cash.

2011 Hay Group. All rights reserved

www.haygroup.com

Table 4: Year on year per cent growth in total cash Percentage 15 12 9 6 3 0 The Netherlands Germany Italy Switzerland France UK Europe

ope

Percentage Europe

15 12 9 6 3 0 Germany France Italy

Table 5: Total cash vs European median Percentage 140 120 100 80 60 Germany The Netherlands France Italy Switzerland UK

Bonuses under continuing scrutiny Concern about short-term incentives, initially focused on the banking sector, are now having a broader impact. The German government, for example, has recommended that all companies use long-term incentive plans as an incentive for sustainable management, and some German companies have even abolished their annual incentive plans. In Switzerland, the conditions for deferred remuneration are being tightened.

10 Top executive compensation in Europe 2011

Long-term incentives
Long-term incentives make up an increasingly significant proportion of total direct compensation. There are signs that long-term incentive plans are becoming increasingly stringent and complex. Some companies have increased the number of performance measures used to determine vesting conditions, or have extended vesting periods beyond three years. It is no longer unusual for companies to require executives to commit to holding periods once awards have vested, as this meets the demand from stakeholders for a closer tie between compensation and long-term corporate performance.

Make up of total direct compensation all executives

2010
25% 25%

2011
34% 34% 34% 34%

40% 40%

35% 35%

31% 31%

Base Base salary salary Bonus Bonus Long-term incentive Long-term incentive

Base Base salary salary Bonus Bonus Long-term incentive Long-term incentive

2011 Hay Group. All rights reserved

www.haygroup.com

Long-term incentive plan prevalence


Performance share plans are the most common European plan, but more than a quarter of executives in the study do not participate in any long-term plan.
Stock option plan Phantom option plan Performance shares/units Restricted shares/units Long term cash plan No Long-term incentives

Region

Europe

27%

2%

45%

7%

15%

26%

Long-term incentives are not without risk. Some plans are too complex or expose payouts to factors beyond the executives control, and are therefore ineffective in motivating performance. Shareholders may be uncomfortable with the potential for equity plans to dilute shareholdings or to award windfall payments to executives. For long-term incentive plans to be effective, they should form part of a consistent overall remuneration strategy. Remuneration committees must make a clear business case for the amount, distribution and forms of reward proposed, and demonstrate the connection to overall business strategy.

Total compensation
When we look at total compensation, we see clearly that where long-term incentives are prevalent, the differences between the markets are further accentuated.

Table 6: Total direct compensation against European median all executives Percentage 160 140 120 100 80 60 France Germany Italy Switzerland The Netherlands UK Europe

12 Top executive compensation in Europe 2011

Sector trends
Automotive There was marked variation in the results for different sectors, with the automotive sector the clear leader in both base pay and total cash. A record year for automotive sales (with global unit sales of over 65 million and revenues of US$1.3 trillion) led to total median cash payments increasing by 83 per cent outstripping all other sectors. The vast majority of the increase in total cash was made up of higher short-term incentive payments, although the median base salary also increased by 9 per cent.

Table 7: Base salary movements by sector 9 Percentage 6 5 4 3 2 1 0 Automotive Chemicals ICT Media Mining Oil and gas Retail Banking and nance Industrial Insurance Pharmaceutical Services Consumer goods Transport Utilities and energy Other All sectors 9 6

Mining Mining executives also saw a relatively high increases compared to their peers in other sectors, receiving a 9 per cent increase in base salary and a 29 per cent increase in total cash. Global demand for metals, combined with the devaluation of US currency, has fueled the financial earnings of most miners, with a corresponding impact on shortterm incentive payments. An average increase in share prices of almost 30 per cent over the past year is likely to have a similar impact on the value of long-term incentives for many mining executives.

2011 Hay Group. All rights reserved

www.haygroup.com

Pharmaceutical A 6 per cent rise in base salary in the pharmaceutical sector was completely offset by a fall in short-term incentive payouts, leaving pharma executives with the same median total cash as last year. Growth in the European pharmaceutical sector has been anaemic in 2010, with revenues increasing on average only by one or two per cent. A combination of pricing pressures from European governments and the expiration of many high-value drug patents has dented investors confidence. In response, many pharmaceutical companies are cutting costs while also investing in acquisitions and expansion into emerging markets and the generic drug sector. The result has been austerity at all levels, including executive reward.

Table 8: Total cash movements by sector 83 Percentage 30 25 20 15 10 5 0 Automotive Banking andf inance Consumer goods Chemicals ICT Industrial Insurance Media Mining Oil and gas Pharmaceutical Retail Services Transport Utilities and energy Other All sectors

Insurance Insurance executives fared worst out of all the sectors, receiving no increase in base salary or total compensation. 2010 was a challenging year for the insurance sector, with turmoil in the sovereign debt market and depressed interest rates leading to an estimated industry average combined ratio below the break-even point. The impact of the sluggish global economy was compounded by relatively high levels of exposure to claims from natural catastrophes.

Differences by role
CEO base salaries have increased slightly less than the base salaries of other executives, indicating that CEOs are leading from the front in terms of austerity measures.
CEOs received a median 1 per cent pay rise in 2011, compared to 3 per cent for other executives. CEOs also received slightly lower increases than the rest of the executive team in total cash. The median increase for CEOs across Europe was 8 per cent, whereas for other executives it was 9 per cent. However, these increases are coming off a significantly higher base, particularly in relation to total cash. The median total cash for European CEOs in 2010 was just short of 2 million, compared to 1.2 million for CFOs and 0.9 million for human resource directors.

Table 9: Actual base salary, total cash and total compensation, by role 3000 2500 2000 1500 1000 500 0 CEO COO CFO Division head Human resourses director Base Salary Total cash Total direct compensation

Non-executive director pay


Fees paid to non-executive directors (NEDs) are the subject of a new Hay Group study, to be released in October 2011. The study examines the NED pay practices of 431 listed companies from 12 European countries, and also provides data on important issues such as the levels and types of experience of NEDs, the representation of women on boards, and the governance context of NED pay. Please contact your local Hay Group contact or email us on execrewardeurope@haygroup.com to register your interest in receiving a copy.

Other Hay Group publications you may be interested in: Corporate governance in Asia Central and Eastern Europe top executive pay report Special report Top executive pay in Brazil Wall Street Journal/Hay Group US CEO compensation study

Africa Cape Town Johannesburg Pretoria Asia Bangkok Beijing Hong Kong Ho Chi Minh City Jakarta Kuala Lumpur Mumbai New Delhi Seoul Shanghai Shenzhen Singapore Tokyo Europe Amsterdam Athens Barcelona Berlin Bilbao Birmingham Bratislava Bristol Brussels Bucharest Budapest Dublin

Frankfurt Glasgow Helsinki Istanbul Kiev Lille Lisbon London Madrid Manchester Milan Moscow Oslo Paris Prague Rome Stockholm Strasbourg Vienna Vilnius Warsaw Zeist Zurich Latin America Bogot Buenos Aires Lima Mexico City San Jos Santiago So Paulo

Middle East Dubai Riyadh Tel Aviv North America Atlanta Boston Calgary Chicago Dallas Edmonton Halifax Kansas City Los Angeles Montreal New York Metro Ottawa Philadelphia Regina San Francisco Toronto Vancouver Washington DC Metro Pacific Auckland Brisbane Melbourne Perth Sydney Wellington

Hay Group is a global management consulting firm that works with leaders to transform strategy into reality. We develop talent, organise people to be more effective and motivate them to perform at their best. Our focus is on making change happen and helping people and organis ations realise their potential. We have over 2600 employees working in 84 offices in 48 countries. Our clients are from the private, public and not-for-profit sectors, across every major industry. For more information please contact your local office through www.haygroup.com.

También podría gustarte