The Advisors' Blog

– Subodh Mishra, ISS Governance Exchange

Top European company executives saw average overall pay increase by nearly 7 percent largely stemming from long-term incentives, according to a new Hay Group study. “Top Executive Compensation in Europe 2013,” which tracks trends in executive remuneration for more than 1,500 senior executives in 21 countries working for 332 of the continent’s 500 largest companies, finds base salaries increased just 2.5 percent, with overall gains due to more companies introducing long-term incentive (LTI) plans while also increasing the value of such plans. “Long-term incentive payments play a more important part than ever in the executive reward mix,” said Carl Sjostrom, Hay Group’s regional director for European reward services, in an Oct. 29 statement. “Not only are they more widespread, payments made under such plans are rising too.”

According to Sjostrom, both are symptoms of the current “conundrum” facing remuneration committees; namely, how companies can continue to keep a lid on pay increases for their most critical people and at the same time attract and retain top talent. Growth in LTI plans evidenced in 2013 is in keeping with recent trends, according to the study, which dates back to 2009. Of the 332 companies examined, 84 percent now utilize such plans compared with 78 percent in 2012. Moreover, the size of awards has also risen by 8.5 percent since 2012, according to study findings.

Meanwhile, though average basic pay across Europe fell in real terms (i.e., below regional levels for inflation), there were wide variations in reward between countries, industry sectors and job titles, the study finds. Executives in France, Germany, Italy and Spain, for example, all saw zero change in their basic pay, on average, while counterparts in Switzerland received a 1.7 percent increase and those in Sweden and the U.K. received 2.7 percent. At the sector level, differences were more marked. Executives in utilities and energy enjoyed a 10.5 percent rise in “total cash” while, at the other extreme, those in the automotive sector were paid 14 percent less than last year.

While pay rises for chief executives were kept well below inflation (their average total cash increase was 1.1 percent), heads of functions and divisional leaders have benefited from rises of around 5 percent. Other key findings of the study include:

– Pay rises for CEOs remain muted but other senior executive roles have seen a significant increase.
– Large variations were found between countries and industry sectors: Spain and Switzerland top the league of highest paying countries, while Nordic countries are the most restrained.
– The pharmaceutical sector continues to pay best, but the greatest increases in “total cash” (salary plus short-term incentive) were found in the insurance and utility sectors. In banking, total cash fell significantly below the overall average.
– Average total direct compensation for CEOs was just over Euro 3 million, whereas the average for other executive roles was Euro 1.5 million.

The study also finds a continuing rise in the use of compulsory deferred bonus plans, which in 2009 were employed by just 19 percent of companies, with the number growing to 41 percent this year after peaking at 43 percent in 2012. According to Sjostrom, post-crisis regulations imposed on the financial services sector not only hit banks but also influenced pay practices in other industries. “Extending deferral time periods with the mantra of ‘the longer the better’ has now been tested against economic realities and though deferrals are clearly working well for many companies, others have decided that alternative incentive combinations also have their place,” said Sjostrom.

Study authors also warn companies to resist the “urge to lower the targets that trigger incentives,” in a bid to recognize and reward top performers, suggesting they will break the link between pay and performance, and, potentially, “trigger another round of governance rules and regulations.” “As Europe’s economy recovers, and the talent market picks up, we expect to see greater discord between companies and investors-and also between different investors with different investment goals,” warned Sjostrom. “This, plus a continued increase in regulatory pressure, means companies will have to learn to better engage and assert themselves to explain the business case for reward.”