Directors of companies listed on the Irish Stock Exchange (ISE) reported an average 12% pay rise last year, with total reward up by over 30%, once variable pay elements such as bonuses were included. By comparison, the average rate of increase on fixed salaries for executives in the United States was about 4 per cent, while the European figures ranged from 3.5 per cent to to 7.5 per cent depending on the country.
The companies listed on the ISE are increasingly motivating their directors by linking a greater portion of their total reward package to company performance, according to research from Hewitt Associates, a global human resources services company. On average 40% of directors’ remuneration is now dependent on business success, aligning reward with investors’ interests. The research, Report on Irish Directors’ Remuneration 2008, also found that directors of companies listed on the ISE reported an average 12% pay rise last year, with total reward up by over 30%, once variable pay elements such as bonuses were included.
Hewitt researched the remuneration packages for directors of all 69 companies listed on the ISE. The companies have a median market capitalisation of €171 million, but ranged from €3 million to €37 billion. Data was provided for the highest paid director (which is typically the CEO, but occasionally the chairman), finance director, other directors (including the board), and other directors (e.g. HR, legal).
Hewitt did not provide a breakdown by company.
The research shows the median fixed salary for the highest paid director was €610,000. When performance-related bonuses and other variable pay elements are included, the total annual reward ranges from a lower quartile of €496,000 to an upper quartile of €2 million reflecting the size of the company. Finance directors’ salaries tend to be around two thirds of their CEO’s salary, while other executive directors’ salaries tend to be slightly lower at 60%, depending on the relative importance of their role, in line with the UK market.Commenting on the survey Rachael Ingle, director, at Hewitt said: “Directors’ reward comprises two basic elements: fixed pay and variable pay, which is incentivised and based on performance. Over the past few years, international investors have been increasingly interested in how directors are motivated and rewarded. As a result of this we are seeing an evolving culture of ‘pay for performance’, with companies motivating their directors by bringing their interests more in line with that of their investors.
“We can now see this trend firmly taking root in companies listed in Ireland, with a significant amount of director’s remuneration linked to business – rather than purely personal – performance. This sends a very positive signal to investors who are interested in the Irish market, as it reflects European and international best practice.”
Better performance measures
Given the increasing link between performance and remuneration the chosen measure of success has come under close scrutiny. The business performance indicator most commonly used to date has been Earnings Per Share (EPS). However, the Hewitt survey shows that many companies are looking to other measures because EPS may not take into account core business objectives.
Rachael Ingle said: “Earnings Per Share is just one measure of business success and it often does not tell the wider story. For example, is the main objective to increase margins? If so, perhaps improvement in this might be a better basis for measure. The key is choosing an appropriate measure – or combination of measures – which links directly to the core business strategy.”
Better use of incentive plans
40% of Irish directors’ total remuneration is now variable pay, directly linked to the performance of the business as a whole. This portion of the overall package generally includes an annual bonus payable for reaching specific yearly milestones plus a longer term share-linked incentive scheme. Hewitt’s research shows that while 60% of companies listed on the ISE currently use share option plans, there has been a significant shift towards long-term incentive plans (LTIPs); in 2008 nearly 35% of companies used LTIPs compared with only 20% in 2006.
Rachael Ingle said: “Share options still appear to be the most popular choice as part of the total reward package. However, we firmly believe that LTIPs are a much better mechanism for reward. Not only are they more cost effective, but they also offer more value to shareholders concerned about dilution of shares. They also more accurately reflect business performance outside market trends, offering more positive returns for the employee. We expect to see a greater shift towards LTIPs over the next few years.”