- Median salary increases remained static at 5% in 2006
- Median bonuses were 37.5% of base pay; down from 41% in 2005
- Improved measures to link all types of reward to business performance targets required
Companies recognise they need to be more modest and conservative when setting their executive reward strategies, according to new research by Mercer Human Resource Consulting, a global leader for HR and related financial advice and services. Meanwile, it's reported that tensions are running high amid the rainmakers and shooting stars of the City as bosses at some of the world's biggest investment banks decide who should pocket multi-million dollar bonuses.
The City of London at twilight - the tall building on the right is 30 St. Mary Axe, popularly known as the Gherkin.
Mercer in its pay report, says that it believes there is still room for improvement when it comes to linking pay and other types of reward to business performance. The study covered reward arrangements for 47 top management positions in 62 major organisations, including FTSE 100 companies and other large multinationals.
Bonus Bonanza in City
The Financial Times reports that the top-end London property market is awash with money. Demand for multi-million pound houses and luxury apartments in prime areas of the capital is at a record high.
Since the summer, estate agents say prices of the most desirable properties in Kensington and Chelsea are rising by as much as 10 per cent every few weeks. Rightmove, the property website, says that the price of the average property in the Royal Borough has risen almost 50 per cent in the past year - to more than £1m.
Howard Elston, an agent with Aylesford International, says: "This market is being driven by an explosion of wealth coming from all sorts of areas."
According to Elston, there is an extraordinary amount of money being generated in the City. The best performers in mergers and acquisitions, private banking and commodities trading are set to receive 30 per cent increases in their year-end pay packets, according to Armstrong International, an executive search firm. More than 4,000 workers are likely to receive bonuses of at least £1m, according to some predictions.Although bonuses across the board are expected to rise between 10 and 35 per cent, only the stellar performers in high-margin growth areas will receive the big payouts. "The best people will be paid so well that rival banks won't be able to hire them away," predicted Matthew Osborne, partner at Armstrong International, the European executive search firm that carried out the survey.
Individual high-performers across structured credit, equity derivatives, fund derivatives, commodities and corporate finance will see increases of up to 30 per cent for for year-on-year bonuses
The FT says that healthy bonuses are just one of a number of factors affecting the unique high-end London market. Elston says the impact of City bonuses is most obvious in the £5m-£10m property bracket. But the very top end market - properties going for tens of millions of pounds - tends to be dominated by international buyers, directors selling their companies or sports and film stars.
Mercer says median salary increases remained at 5% of base pay in 2006, though arrangements varied considerably between and within organisations. By way of comparison, the median increase in 2001 was 9.1%.
“While executive reward packages continue to attract attention and their increase rate outstrips those awarded to other employees, pay increases for senior managers have been fairly consistent over the last couple of years and have stabilised considerably compared to five years ago.
“This stability is due to a number of factors, particularly the advent of stronger and better informed remuneration committees. Media and shareholder scrutiny, increased disclosure requirements and the pressure to control costs have also played a part,” said Richard Lamptey, principal at Mercer.
Median annual bonuses in the organisations surveyed were 37.5% of salary in 2006 compared to 41% in 2005. But there were wide variations between companies in terms of bonus payments. For example, bonuses for Group Chief Executives paid out up to 200% of salary while those for Finance Directors were between 0% and 160%. Interestingly, bonus ranges for many positions were significantly narrower in 2001, when Group Chief Executives’ bonuses varied from 10% to 82% of salary.
The survey also found the majority of bonus plans used a combination of financial and non-financial measures, most often with a balanced split of 50:50.
Lamptey commented: “It is now common for executives to have formal bonus schemes with specific financial and non-financial objectives but, increasingly, the emphasis is on ensuring rewards more closely reflect performance. By improving these links, companies can demonstrate to shareholders that they are not paying for mediocrity.”
Performance share plans remain the most prevalent form of long-term incentive (LTIs), with 42% of survey participants operating this type of incentive compared with 36% last year. The proportion of companies offering bonus matching and other forms of LTIs, such as cash plans, remained broadly stable in 2006.
In separate research, Mercer’s analysis of the ABI’s Institutional Voting Information Service reports for FTSE 100 and FTSE 250 companies found few companies were flagged up in terms of remuneration-related issues. Mr Lamptey found these results encouraging and concluded: “Remuneration committees are definitely paying more attention to public perceptions of executive pay practices. Companies now make greater effort to contain potential excesses, and give plenty of explanation where greater awards are necessary to attract and retain the high-calibre individuals that are crucial to success.”
The effective date of the pay and benefits data analysed in this study is 1 June 2006.
Virtually all the roles surveyed received bonuses in the 2006 survey. Please note that bonuses payments made in 2005/2006 often relate to performance in 2004/2005.
Mercer Human Resource Consulting is a global leader for HR and related financial advice and services, with more than 15,000 employees serving clients in more than 180 cities and 40 countries and territories worldwide. The company is a wholly owned subsidiary of Marsh & McLennan Companies, Inc., which lists its stock (ticker symbol: MMC) on the New York, Chicago, Pacific and London stock exchanges.
It is the largest consulting firm of its type in the UK, with some 3,000 staff in 19 office locations.