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News: Long term incentives boost FTSE director earnings

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7th Nov 2012
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Basic pay and bonus growth for FTSE-100 directors has slowed almost to a halt over the last year, with salaries matching inflation and bonuses down on the previous year, new figures from Incomes Data Services have revealed.

However a big rise in the value of vested long term incentive plans (LTIPs) awards means that directors’ total earnings have still increased by 10 per cent on average. The payment of some high incentives pushed the average rise even higher to 27%.

The median total earnings of FTSE 100 CEOs was £3.2 million, while the average was £4 million based on individual increases received by a matched group of directors who have been in post for two full years.

Total earnings refers to fixed pay, salary and benefits, the value of bonuses earned during the year, both cash and deferred, plus the ‘crystallised’ money value of any long term incentive plan (LTIP) awards and the nominal gains made on the exercise of any share options cashed-in during the year.

According to IDS, the salary rises for FTSE-100 directors increased by a median of 3.5% but the value of bonus payments received actually declined by 4.9%. Across all FTSE-100 directors, the value of LTIPs rose by 81% from a median of £519,625 in 2011 to £938,888 this year. For chief executives, the value of vested LTIPs reached a median of £1.6million.

Steve Tatton, Editor of IDS’ Directors Pay Report 2012/13 said reaction to Government pressure, shareholder concerns or a worse than expected business environment were all possible explanations for the slowdown in basic pay growth among FTSE-100 bosses.

“However while shareholders will be pleased to see more traditional elements of pay seemingly slowing, these figures show that directors’ earnings can still grow significantly as a result of a complex mix of incentives,” Tatton said.

LTIPs are now used by more than 90% of the FTSE-100, according to IDS, and are designed to incentivise directors over a longer term period. They are typically granted in the form of shares and are closely linked to shareholder returns, with directors typically having to reach a minimum target before any shares are granted.

Many LTIPs are based on comparative performance with competitors, rather than their own company’s historical performance, meaning that directors stand to earn a payment even if their company’s performance has worsened – as long as their chosen peer group has done even worse.

“Shareholders will not take issue with directors’ earnings increasing, provided they are doing so in line with company performance and share price,” Tatton said.

 

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