more important Top executive compensation in Europe 2012

Transcription

1 Getting it right has never been more important Top executive compensation in Europe 2012 Scrutiny of executive remuneration has intensified over the past 12 months, as pay has been thrown into sharp relief by austerity measures across Europe. Although executive reward increases are no longer outpacing inflation or general employee pay, it remains a politically-charged topic. Companies have responded to political, public and shareholder pressure, and sought to link pay more closely to performance. However, this exposes reward to the mercy of an increasingly volatile market as performance links have been more aligned with compliance and what others do than business realities. It is time for companies to take control and develop executive pay plans that are fit for purpose.

2 This is a summary of the key trends and developments in European executive pay over the past 12 months, as set out in Hay Group s study of Top executive compensation in Europe Top executive compensation in Europe 2012 is the most comprehensive study of European executive reward available. It analyses compensation data from 318 European FT 500 companies, providing market context and thorough analysis to help firms make informed decisions. The study covers the top team accountable for group performance, typically the chief executive and the rest of the management board or the executive committee. To purchase the full study, or for more information, please speak to your local Hay Group contact or contact execrewardeurope@haygroup.com

3 Key trends Pay under the microscope Scrutiny of executive pay has heightened. The intense focus on executive pay that began during the financial crisis shows no signs of abating. On the contrary, governments, regulators and shareholders across Europe are still showing an appetite for increased control of executive reward. In many countries, this has resulted in new regulation. In Austria, for example, a new corporate governance code has been introduced, which will require more detailed disclosure of remuneration practices. Significant change may also occur in Switzerland, whose authorities have traditionally taken a non-interventionist approach to executive pay. A parliamentary vote on the long-debated Minder initiative is planned for If approved, the measure will effectively transfer power over approval of executive pay from the board to shareholders. In France, the newly-elected socialist Government seized on the issue to demand limitations on executive pay in state owned businesses and greater control over the use of stock options as long-term incentives. In Italy, meanwhile, Government intervention has led to increased disclosure when it comes to executive pay in listed companies, as well as more stringent rules on the pay of CEOs and chairs of state-owned enterprises. Governments, regulators and shareholders across Europe are showing an appetite for increased control of executive reward.

4 4 Top executive compensation in Europe 2012 Pay as public property The public and media attitude towards pay remains hostile. Executive remuneration has become a hot topic in almost every European country. The attitude of the public, coloured by an aggressive approach to the subject in many sections of the media, remains hostile. The general message is that top executives are overpaid, especially in comparison to the general employee population. Regarded as divorced from the reality of most people s lives, executive pay has become a popular target for public scorn. A consequence of the financial crisis has been that the business of banks and other institutions that received government bailouts is no longer considered private. In the same way, executive reward has become as much a political as a commercial matter Hay Group. All rights reserved

5 Shareholders springing into action? Shareholder activism is increasing, responding to regulatory fears. Shareholders are beginning to take a firmer stance on executive pay, in what has been dubbed by media as the shareholder spring of To a large extent this has been as much defensive as pushing for better governance across the continent with shareholders anxious that unless they are seen to act regulators will make them. For example, although a mandatory and binding shareholder vote on executive pay exists in only a minority of countries, growing numbers of governments are considering the measure. Countries such as the UK are looking to follow the example of the Netherlands, Norway, Denmark and Sweden, which implemented binding shareholder votes many years ago. The UK has experienced one of the most significant surges in shareholder activism. A number of major listed companies shareholders voted against their remuneration report, while many others registered a notable level of dissent. The British government plans to grant shareholders an annual, binding vote on directors executive pay from 2013, although companies that leave their remuneration policy unchanged will only be required to hold a vote once every three years. France has also seen elevated levels of activism. According to Institutional Shareholder Services, 14 of the 15 long-term incentive plans voted down in Europe last year belonged to French firms. A taxing time Less for revenue, more for show. Top executives, as high earners, have also seen their tax liabilities rise, a trend that has been particularly pronounced in countries more severely affected by the European debt crisis. Measures aimed at taxing high earners have been introduced by a number of governments such as Portugal, Spain, Greece and France. Portugal increased the tax rate for incomes over 153,300. Spain implemented a substantial rise in the tax rate for those earning more than 120,000, as well as new controls on tax relief for long-term incentives and severance payments. Greece increased the income tax rate for high earners, as well as introducing a new taxation system for company cars based on the value of the vehicle. The tax regime for stock options was also amended to better capture the gains made from awards. Perhaps most significantly, France introduced a new 75 per cent top rate of income tax.

6 6 Top executive compensation in Europe 2012 The picture in The cautious approach to pay continues. Base salary Figure 1: Median year-on-year per cent growth in base salary (same job, same incumbent) Percentage Against a backdrop of austerity, it is perhaps understandable that base salary increases in 2012 were largely cautious across Europe. Base salaries rose by 2 per cent, compared with 2.6 per cent last year. In comparison, across the general European employee population, salaries rose by 2.1 per cent in Figure 2: Country median base salary as per cent of European median Europe 90 France Germany Italy Switzerland The Netherlands UK France Germany Italy Switzerland The Netherlands UK Europe Percentage 2012 Hay Group. All rights reserved

7 The highest increases in base salary were awarded in Switzerland (median 4.8 per cent). Germany saw growth stagnate in 2012, following a 4.2 per cent increase the year before, partly due to new regulations on sustainable pay that served to restrict bonus payments. Italy also experienced zero growth in base salary, for the second year in a row. The picture in Italy and Germany is a reflection of widespread austerity as markets remain depressed, increased regulation and rising shareholder activism. These factors have made fixed pay increases more difficult to defend. Despite this, both German and Italian executives remain relatively well paid in salary terms compared to the European median and executives in Switzerland continue to enjoy high fixed pay in comparison to Europe as a whole. 1 It should be noted that the samples represent the companies from these countries that are among the European FT 500 index constituents. For a broader look at executive reward in each country, please see the relevant local top executive study. Against a backdrop of austerity, it is perhaps understandable that base salary increases in 2012 were largely cautious across Europe.

8 8 Top executive compensation in Europe 2012 Short-term incentives Short-term incentive payouts against targets vary considerably from country to country, reflecting differing economic circumstances and approaches to target setting. Although target bonus opportunities continued to increase in 2012, payouts were flat at the European median, which compares to a 10.5% increase last year. To put this into further context, some 56 per cent of executives were paid the same or less than the previous year whereas in 2011 this number was 40 per cent. Figure 3: Short-term incentive payouts against targets 2011/ / % 44% 32% 60% 10% 8% Increased Same as previous year Decreased Increased Same as previous year Decreased Hay Group. All rights reserved

9 Deferred bonuses There has been an increasing use of deferred bonus plans in recent years, driven primarily by the financial services sector. Bonus deferral has become increasingly prevalent in Europe since the beginning of 2011, when new EU rules on capital requirements for credit institutions and investment firms (CRD III) forced banks to adopt remuneration practices that pay out over longer periods. In other sectors, deferred bonuses are also on the rise, albeit at a slower pace. Overall, 43 per cent of companies now have a compulsory deferred bonus plan; more than double the proportion seen in Table 1: Percentage of companies with compulsory bonus deferral % 33% 25% 19% 56 per cent of executives were paid the same or less than the previous year whereas in 2011 this number was 40 per cent...

10 10 Top executive compensation in Europe 2012 Total cash Across Europe, total cash levels were essentially unchanged in 2012 at 0.8 per cent; and should be compared to inflation at 2.7 per cent. This reflects modest increases in salary levels, as well as depressed bonus payouts across the region. In comparison, in 2011, total cash increased in all European countries, much of which was attributable to bonus payouts. None of the major countries in the study showed a median total cash increase of more than 1 per cent. Figure 4: Country median total cash as per cent of European median 150 Percentage France Germany Italy Switzerland The Netherlands UK Hay Group. All rights reserved

11 Figure 5: Country median total cash increases versus GDP and inflation France Germany Italy Switzerland The Netherlands Percentage UK Median total cash GDP Inflation. Across Europe, total cash levels were essentially unchanged in 2012 at 0.8 per cent; and should be compared to inflation at 2.7 per cent.

12 12 Top executive compensation in Europe 2012 Long-term incentives Performance share plans remain the most popular long-term incentive and have continued to gain popularity, growing by 7 percentage points since per cent of executives now participate in a plan of this type. Interestingly, the decline in stock option plans has ceased but the proportion of executives with no long-term incentive plan has fallen, from 26 per cent in 2011 to 22 per cent in Table 2: Long-term incentive plan prevalence in Europe Stock option plan Phantom option plan Performance shares/units Restricted shares/units Long-term cash plan No long-term incentives 28% 2% 52% 9% 16% 22% 2012 Hay Group. All rights reserved

13 Total direct compensation The breakdown of total direct compensation shows little change year on year. Longterm incentives represent a steady proportion of target total direct compensation at roughly one third. Figure 6: Make-up of target total direct compensation % 44% 29% 44% 28% 27% Base salary Target bonus Long-term incentive Base salary Target bonus Long-term incentive As expected, in those countries where long-term incentive plans are most prevalent, namely Switzerland, Germany and the UK, target total direct compensation is far higher than the European median. Figure 7: Median target total direct compensation as per cent of European median Percentage Europe France Germany Italy Switzerland The Netherlands UK

14 14 Top executive compensation in Europe 2012 Sector trends Understandably, levels of executive pay increases vary considerably across sectors, reflecting the volatile economic environment and variations in talent markets. Figure 8: Median year-on-year per cent growth by sector (same job, same incumbent) Percentage Automotive Banking and finance Consumer goods Chemicals ICT Industrial Insurance Media Mining Oil and gas Pharmaceutical Retail Services Transport Utilities and energy Other Growth in base salary Growth in total cash Hay Group. All rights reserved

15 Automotive As per last year, the automotive sector outstripped most others in terms of salary increases. Despite the threat of declining consumer confidence during the second half of 2011, the industry rallied, ending the year with revenue growth of 6.3 per cent over This has been reflected in pay. Median total cash payments increased by 9 per cent. Base salaries rose by 6.3 per cent, compared with 9 per cent the previous year. However, the future for the industry is less certain; much of the European market is facing fierce competition from Asia, which continues to dominate the sector, representing 47 per cent of its total value in The automotive industry in Asia saw compound growth of 3.8 per cent between 2007 and 2011, compared to 2.1 per cent in Europe and 2.5 per cent globally. Global sector performance is expected to accelerate until 2016, with unit volumes expected to increase at a compound rate of around 7 per cent a year. The European share of this growth remains to be seen. Mining It has been a challenging year for the mining sector, which suffered a steep decline in total shareholder return over the past 12 months, despite having grown spectacularly the previous year. Economic slowdown in China and India, the Eurozone crisis and continued consolidation all contributed to a difficult environment for the industry. This is reflected in pay trends in a sector that has historically enjoyed relatively high executive compensation increases compared to other industries. Until recently, the strong performance of mining companies has resulted in a corresponding boom in short and long-term incentive payments. In the face of declining market demand, however, the HSBC Mining Stock Price Index fell by almost 20 per cent between 2011 and As a result, short-term incentive payouts are lower than in previous years. Median salary growth remained reasonably high, at 4.3 per cent, a reflection of talent shortages in the sector. However, this only partly offsets the fall in bonus payments: median total cash fell by about 3 per cent.

16 16 Top executive compensation in Europe 2012 Pharmaceutical Pharmaceutical revenues have fallen by 1 per cent across Europe during 2012 and many companies are continuing to cut costs including executive reward - to prepare for a difficult outlook. Branded pharmaceuticals in particular have seen significant price cuts as the pressure to reduce prices sustains. The sector is effectively entering a phase of transformation, in which companies may reposition as healthcare providers, helping governments to manage the rising costs of healthcare. As a result, growth in base salaries, which increased by 6 per cent last year, fell back to 2.5 per cent in The picture was similar for total cash. However, this remains a reasonable performance compared to many other sectors, albeit a cautious one for a traditionally well-rewarded sector. Banking and finance Banking and finance have experienced sustained pressure from regulators. Further change is on the way, in the shape of CRD IV and local regulatory actions. More fundamentally, however, the banking business model is changing dramatically, and compensation arrangements are yet to settle into this new reality. Some banks have already announced significant structural changes and layoffs, which can be expected to continue during the coming year. We also expect shareholder demand for a reweighting of profit sharing to trigger new compensation practices, as many high-earning business units have disappeared and are no longer able to subsidise less profitable divisions. As is to be expected in this climate, banking and finance executives base salaries and total cash payments were flat at the year-on-year median Hay Group. All rights reserved

17 Differences by role Increases in CEO base salaries and total cash were below the overall median for all executives which may indicate that remuneration committees are keen to demonstrate restraint at the top amid difficult economic conditions. CEOs and remuneration committees will also no doubt be aware that media attention tends to focus on CEO pay, rather than that for any other role. COOs saw the biggest increases in base salary, at the median 4.2 per cent, as well as the largest increase in total cash. Figure 9: Year on year per cent growth in base salary by role (same job, same incumbent) Chief operating officer Human resources director Chief executive officer Chief financial officer Division head 0 1% 2% 3% 4% 5% Percentage increase in base salary

18 A final comment... Investor activism, regulation and public pressure over the past few years have combined to force many changes to executive compensation policies across Europe. This has led to serious concerns that responsibility for corporate governance has first shifted from boards to investors, and is now shifting to political control. While there is little indication that the level of interest in executive pay will fall away, there are worrying signs that in an effort to react to the pressure, many companies are losing sight of their strategic aims in setting executive reward packages. In the drive to comply with regulation, the wider picture is being lost. Linked to this is the importance that companies explain themselves. Proposals are increasingly reviewed mechanistically by investors, proxy advisors and regulators alike; and without the context of a company s story much may be lost. Executive reward plays a vital role in driving performance, now and in the future. The best reward policies are closely tied to the company s strategy and supporting its successful implementation. Hence it is critical that executive reward not only responds to regulatory pressure but also, more importantly, to the rapidly changing business environment.

19 As the importance of corporate governance increases, interest in the non-executive directors who create and enforce governance will follow. This review provides a detailed snapshot of the background, experiences and pay of the individuals responsible for the governance of Europe s companies. October 2011 Corporate governance and executive pay Pay practices, structures and diversity of leading European companies How healthy is the corporate governance environment and is the flurry of recent measures aiding or hindering recovery? We interviewed companies, investors and regulators from around the world to take the temperature of corporate governance and executive reward today. Have you seen? Non executive directors in Europe Non-executive directors in Europe This study examines the NED pay practices of listed companies from European countries, and also provides data on issues such as the levels and types of experience of NEDs, the presentation of women on boards and the governance context of NED pay. Taking the pulse Corporate governance and executive reward Based on in-depth interviews with companies, investors and regulators conducted across 17 countries, this study captures the priorities and identifies the key concerns of leading players in the governance debate today. To purchase the full study, or for more information on local country reports, please speak to your local Hay Group contact or contact execrewardeurope@haygroup.com

20 Africa Cape Town Johannesburg Pretoria Asia Bangkok Beijing Ho Chi Minh City Hong Kong 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 Bogotá Buenos Aires Caracas Lima Mexico City San José Santiago São 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 85 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