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The economy may be slowing, stock markets falling and the outlook for company profits getting bleaker, but there is no sign yet that corporate executives are feeling the pinch.
A report from business advisory firm Deloitte says the median increase in salary for FTSE 100 and FTSE 250 directors has shaded a fraction in the past 12 months, from 7% to 6.2% However this is still well above the rate of inflation, and of course salary is just one part of the typical senior executive pay package. Most also have an annual bonus and long-term incentive plans (LTIPs).
These have also been going up. Deloitte found that a quarter of the top 100 companies and a fifth of FTSE 250 firms increased the size of executive bonuses last year so the median potential bonus in the FTSE 100 is now 150% of salary, and 185% of salary in the top 30 of that group. In FTSE 250 companies, it is normally 100%.
The proportion of the bonus that was actually paid out also increased, and typically was around 70% to 80% of the theoretical maximum. More than three-quarters of plans paid out in excess of their target level, implying either that the executives were remarkably skilled in what they achieved, or that the targets were too easy. Only 6% of plans paid out nothing. The consequence of a bigger percentage being paid out on bonuses that have themselves been increased is to deliver a significant increase in pay. No recession here.
The same thing is happening to LTIPs. In the past five years, the potential payout in FTSE 100 companies has on average risen from 100% of salary to 155%. Among the top 30 companies, the increase is even more startling — from 125% to 255% of salary. The average payout on the 2004 vintage that matured in the last year was 50%.
FTSE 250 payouts have held the line at 100%.
This whole thing could be heading for trouble because this mish-mash of salary bonus and long-term incentives is another creature of the long bull market, which has yet to be properly tested in recessionary conditions. Already indeed we have seen with LTIPs that when the shares fall, the schemes usually get rebased to stop executives defecting to a rival. Unfortunately there is no such easy rebasing for the shareholder nursing the losses.
Bonuses could well have similar problems. The big percentage of high payouts suggests in fact that bonuses are no longer thought of as a reward for exceptional performance but instead are seen as something to which the executive feels entitled.
So regularly and so generously have they paid out that they have come to rely on them. But if business conditions do get tough, then logically large numbers of executives should fail to hit their targets and the payouts should dwindle. However, if they have grown used to the largesse and it suddenly dries up, they are likely to be seriously disgruntled.
No board wants a disgruntled chief executive, so it is already almost inevitable that new, convoluted ways will be found to shell out the missing dosh —making an even bigger nonsense of the performance pay racket. Shareholders will no doubt grumble but really they should not because they brought all this on themselves by agreeing to performance pay in the first place.
The timebomb of public pensions
Most people are aware that public sector pensions are potentially a huge drain on the next generation of taxpayers, but they tend to be much less aware that current decisions are still making things worse.
To add insult to that injury, accounting conventions are being used to disguise the true cost in the public accounts. This at least is the view of pensions consultant John Ralfe, who has spent the past few months trying to make sense of unfunded public-sector pensions, and plans to unveil his findings at a seminar tomorrow, organised by a think-tank, the Centre for the Study of Financial Innovation.
The key component in what appears to be a financial sleight of hand is the discount rate used to calculate future liabilities. As public-sector pensions are inflation-proofed, Ralfe says the right measure for the calculation is the yield on inflation-linked gilts, which at April last year was 1.2% real. However, the Treasury decreed in 2001 that the rate to be used for calculating liabilities should be 3.5%, and it has not changed since.
The effect of this is dramatic. The Government's measure of the notional annual cost of pension provision for 2008 after allowing for employee contributions is £15 billion a year on a payroll of £90 billion. Ralfe says that if Government used what he says is the correct measure, the cost would be seen to be twice as much — a frightening £30 billion a year.
