Top Executive Compensation in Europe

7/31/2019 Top Executive Compensation in Europe

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Fixed pay stagnated and bonus payments rose in

2011, as companies strengthened links between

pay and perormance.

More than ever, companies need to tailor pay

packages to their own unique circumstances, or risk

executive pay being determined by an increasingly

temperamental market.

www.haygroup.com

Rewardaligned withstrategyTop executive compensationin Europe 2011


2/16

This is a summary o the key trends and developments

in European executive pay over the past 12 months, as

identied in Hay Groups Top executive compensation in

Europe 2011.

Top executive compensation in Europe2011 is the most

comprehensive study o European executive rewardsavailable today. It analyses compensation data rom

312 European companies drawn rom the Financial

Times Europe 500, providing the competitive context

and top-quality analysis needed to make inormed

executive decisions.

For more inormation, about the report please speak

to your local Hay Group contact.


3/16

Key trends

Return on reward investment

The recession has introduced a greater

degree o discipline into executive pay.

In boom markets, many companies were driven almost exclusively by

a concern or the competitiveness o their pay package.

There is now an emerging ocus on return-on-investment in reward, with

companies looking to tie executive packages more explicitly to the value

they generate. This is reected in this years study, with companies taking a

cautious approach on base salaries. Executives are instead being rewarded

or improvements in business perormance through variable pay, with rises

and alls in total compensation over the past year driven almost entirely by

short- and long-term incentive awards.

Companies are takinga cautious approach

on base salaries.


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Top executive compensation in Europe 20114

2011 Hay Group. All rights reserved

Room to move?

High levels o scrutiny o executive pay have now

become entrenched, particularly in the mature

markets and the banking sector.

Regulation and shareholder activism across Europe have meant that remuneration

committees are being asked to demonstrate how reward decisions and perormance

metrics relate to the long-term interests o the company and its shareholders.

As a result, many companies have had to modiy their compensation decisions in order

to meet new regulatory requirements and are spending much more time and eort

explaining the rationale o their decisions to a ar wider audience than beore. Some

countries, such as Germany and Italy, have been so swamped by regulation that they

have become preoccupied with meeting it. The result is that many companies across

Europe are concentrating on compliance at the expense o strategy.

Those who do look or an innovative solution can nd their eorts ill-appreciated.

Pressure has, or example, been mounting rom shareholders o UK companies to

take less o a one size ts all approach to executive remuneration matters. This has

resulted in a small increase in the number o companies taking unusual, new or

tailored arrangements to investors. Having done as shareholders requested, some

remuneration committees have been dismayed to discover that investors can be

highly sceptical o such unamiliar arrangements.


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The risks o pay-at-risk

The volatility o short-term incentive payouts has

increased signicantly over the past three years.This appears to be driven by increased volatility in sector perormance, as variations

are clearly marked by sector. We believe this trend is likely to continue as market

conditions remain uid, making it difcult or remuneration committees to predict

perormance outcomes.

A greater proportion o variable pay results in a higher degree o uncertainty

around total compensation, or both employer and executive. In a volatile and

depressed market, companies have to ind a way to balance between ensuring

that pay relects corporate perormance which may be aected by things

beyond the executives control and still remains competitive, in order to attract

and retain the executive talent needed.

As the importance o equity incentives continues to increase (they now make up 33

per cent o total direct compensation, compared to 25 per cent last year), companies

will also have to deal with the inherent volatility o these instruments. The

appeal o these plans is that the share price acts as a built-in perormance

measure, aligning the interests o executives with those o shareholders.

However, increased volatility in the general market will lead to gains and losses

unconnected to corporate perormance. This is oten a diicult outcome tosell to stakeholders, and (in the case o losses) to the executives themselves.

It is thereore all the more critical that equity incentives be agreed as par t o a

coherent executive remuneration strategy, and the potential or windalls and

losses accepted by employees and stakeholders as the price to be paid or tying

executive pay to share perormance.


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As austerity measures continue to bite across much

o Europe, base salaries remain largely stagnant.

The highest xed pay rises were seen in Germany, which saw a 4.2 per cent increase

in base salaries, due in part to new regulations on sustainable pay that have restricted

bonuses, and in part to the relatively good perormance o the German economy.

In contrast, French base salaries did not grow at all. French companies agreed to a

code o conduct in 2008 that recommends increases in top executive base salaries

at relatively long maturities, such as three years. Given the level o scrutiny around

executive pay, ew companies are willing to go outside the codes provisions and

this is likely to be depressing French salary increases.

90

100

110

120

France

Ge

rmany

Italy

Switz

erland

TheNethe

rlands

UK

Percentage

Europe

Table 2: Base salary as per cent o European median

The picture in 2011

0

1

2

3

4

5

France

G

ermany

Italy

Switzerland

heNeth

erlands

UK

Percent

age

Table 1: Year on year per cent growth in base salary

Europe

Base salary


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In Italy, salaries were eectively at, with executives receiving only a 0.2 per cent

increase. Italian companies have been hit with greater regulation and disclosure

requirements, and have also seen a surge in shareholder activism with greater

numbers o board directors being nominated by institutional investors. This

has combined with a general austerity due to a depressed market, making signicant

xed pay increases eectively untenable or many.

Europe

France

Germany

Italy

Switzerland

TheNetherlands

UK

GDP Ination Base salary

0

1

2

3

4

4.5

3.5

2.5

1.5

0.5

5

Table 3: Base salary increases vs GDP and infation all executives


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8


Short-term incentive payouts against target

Our survey indicates that 60 per cent o executives Europe-wide were paid as

much or more than their target bonus amount, and 40 per cent were paid less.

The UK, Belgium and Germany perormed particularly strongly, with 79 per cent

o executives in the UK receiving more than their target bonus, 72 per cent in

Belgium and 71 per cent in Germany. In contrast, only 39 per cent o executives

in France received their target bonus or more.

The spread o payouts was wide, reecting a volatile market. One quarter o

executives received 142 per cent or more o their target bonus, while a quarter

received 91 per cent or less. The median payout was 111 per cent o target,

reecting the overall improvement in market perormance across Europe.

Banks deer incentive payouts

The banking sector has seen particularly close scrutiny around

incentive payments. A consequence o this has been an increase

in deerred bonus plans and claw back provisions. Seventy two per

cent o banks covered by the study now use deerred bonuses,

compared to only 44 per cent last year. The mandatory amount

deerred ranged between 50 per cent to 100 per cent o the

short-term incentive award.

This development reects an increased emphasis on the long

term, in part in response to regulation and in part because o

stakeholder concerns about the use o short-term incentives.

Political pressure on executive bonuses in banking remains high

in The Netherlands, or example, there have been demands or

the government to retroactively tax bonuses paid since 2008.

Total cashMedian total cash (base salary plus short-term incentive payment) increased in

all countries, with much o those increases coming rom bonus payments. The

results generally track the perormance o those country markets, with French

and Italian executives once again seeing the smallest rises. The most signiicant

rise in bonuses came rom Switzerland, where executives received little or no

base salary increase, but a 12.5 per cent median increase in total cash.


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Bonuses under continuing scrutiny

Concern about short-term incentives, initially ocused on

the banking sector, are now having a broader impact. The

German government, or example, has recommended that

all companies use long-term incentive plans as an incentive or

sustainable management, and some German companies have

even abolished their annual incentive plans. In Switzerland, the

conditions or deerred remuneration are being tightened.

Europe

France

Germany

Italy

Switzerland

TheNetherlands

UK

Percentage

60

80

100

120

140

Table 5: Total cash vs European median

Europe

Percentage

France

Germany

Italy

Switzerland

TheNetherlands

UK

0

3

6

9

12

15

Table 4: Year on year per cent growth in total cash


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10


Long-term incentives

Long-term incentives make up an increasingly signicant proportion o total

direct compensation.

There are signs that long-term incentive plans are becoming increasingly

stringent and complex. Some companies have increased the number o

perormance measures used to determine vesting conditions, or have extended

vesting periods beyond three years. It is no longer unusual or companies to

require executives to commit to holding periods once awards have vested, as

this meets the demand rom stakeholders or a closer tie between compensationand long-term corporate perormance.

Base salary Bonus Long-term incentive

35%

40%25%

Base salary Bonus Long-term incentive

31%

34%34%

Make up o total direct compensation all executives

2010 2011


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Long-term incentives are not without risk. Some plans are too complex or expose

payouts to actors beyond the executives control, and are thereore ineective in

motivating perormance. Shareholders may be uncomortable with the potential or

equity plans to dilute shareholdings or to award windall payments to executives.

For long-term incentive plans to be eective, they should orm part o a consistent

overall remuneration strategy. Remuneration committees must make a clear business

case or the amount, distribution and orms o reward proposed, and demonstrate the

connection to overall business strategy.

Long-term incentive plan prevalence

Perormance share plans are the most common European plan, but more than

a quarter o executives in the study do not participate in any long-term plan.

RegionStock option

plan

Phantom

option plan

Perormance

shares/units

Restricted

shares/units

Long term

cash plan

No Long-term

incentives

Europe 27% 2% 45% 7% 15% 26%

Europe

France

Germany

Italy

Switzerland

Th

eNetherlands

UK

Percentage

60

80

100

120

140

160

Table 6: Total direct compensation against European median all executives

Total compensation

When we look at total compensation, we see clearly that where long-term incentives

are prevalent, the dierences between the markets are urther accentuated.


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12


Sector trends

Automotive

There was marked variation in the results or dierent sectors, with the automotive

sector the clear leader in both base pay and total cash. A record year or automotive

sales (with global unit sales o over 65 million and revenues o US$1.3 trillion) led to

total median cash payments increasing by 83 per cent outstripping all other sectors.

The vast majority o the increase in total cash was made up o higher short-term

incentive payments, although the median base salary also increased by 9 per cent.

Mining

Mining executives also saw a relatively high increases compared to their peers in other

sectors, receiving a 9 per cent increase in base salary and a 29 per cent increase in total

cash. Global demand or metals, combined with the devaluation o US currency, has

ueled the nancial earnings o most miners, with a corresponding impact on short-

term incentive payments. An average increase in share prices o almost 30 per cent

over the past year is likely to have a similar impact on the value o long-term incentives

or many mining executives.

Automotive

Bankingandnance

Consumergoods

Chemicals

ICT

Industrial

Insurance

Media

Mining

Oilandgas

Pharmaceutical

Retail

Services

Transport

Utilitiesandenergy

Other

Percentage

All sectors

0

1

2

3

4

5

6

9 9 6

Table 7: Base salary movements by sector


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Pharmaceutical

A 6 per cent rise in base salary in the pharmaceutical sector was completely oset

by a all in short-term incentive payouts, leaving pharma executives with the same

median total cash as last year. Growth in the European pharmaceutical sector has been

anaemic in 2010, with revenues increasing on average only by one or two per cent.

A combination o pricing pressures rom European governments and the expiration

o many high-value drug patents has dented investors condence. In response, many

pharmaceutical companies are cutting costs while also investing in acquisitions and

expansion into emerging markets and the generic drug sector. The result has been

austerity at all levels, including executive reward.

Insurance

Insurance executives ared worst out o all the sectors, receiving no increase in base

salary or total compensation. 2010 was a challenging year or the insurance sector,

with turmoil in the sovereign debt market and depressed interest rates leading to an

estimated industry average combined ratio below the break-even point. The impact o

the sluggish global economy was compounded by relatively high levels o exposure to

claims rom natural catastrophes.

Automotive

Bank

ingandfinance

C

onsumergoods

Chemicals

ICT

Industrial

Insurance

Media

Mining

Oilandgas

Pharmaceutical

Retail

Services

Transport

Utilitiesandenergy

Other

Percentage

0

5

10

15

20

25

30

83

All sectors

Table 8: Total cash movements by sector


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Dierences by role

CEO base salaries have increased slightly less

than the base salaries o other executives,

indicating that CEOs are leading rom the

ront in terms o austerity measures.

CEOs received a median 1 per cent pay rise in 2011, compared to 3 per cent or other

executives. CEOs also received slightly lower increases than the rest o the executive

team in total cash. The median increase or CEOs across Europe was 8 per cent,

whereas or other executives it was 9 per cent.

However, these increases are coming o a signicantly higher base, particularly

in relation to total cash. The median total cash or European CEOs in 2010 was just

short o 2 million, compared to 1.2 million or CFOs and 0.9 million or human

resource directors.

CEO

COO

CFO

Divisionhead

Human

resoursesdirector

Base Salary Total cash Total direct compensation

0

500

1000

1500

2000

2500

3000

Table 9: Actual base salary, total cash and total compensation, by role


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Non-executive director payFees paid to non-executive directors (NEDs) are the subject

o a new Hay Group study, to be released in October 2011.

The study examines the NED pay practices o 431 listed

companies rom 12 European countries, and also provides

data on important issues such as the levels and types o

experience o NEDs, the representation o women on boards,

and the governance context o NED pay.

Please contact your local Hay Group contact or email

us on [email protected] to register your

interest in receiving a copy.

Other Hay Group publications you may be interested in:

Corporate governance in Asia

Central and Eastern Europe top executive pay report

Special report Top executive pay in Brazil

Wall Street Journal/Hay Group US CEO compensation study


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Hay Group is a global management consulting rm that works with

leaders to transorm strategy into reality. We develop talent, organise

people to be more eective and motivate them to perorm at their best.

Our ocus is on making change happen and helping people and organis

ations realise their potential.

We have over 2600 employees working in 84 ofces in 48 countries.

Our clients are rom the private, public and not-or-prot sectors, across

every major industry. For more inormation please contact your local

ofce through www.haygroup.com .

Arica

Cape Town

Johannesburg

Pretoria

Asia

Bangkok

Beijing

Hong Kong

Ho Chi Minh City

Jakarta

Kuala Lumpur

Mumbai

New Delhi

Seoul

Shanghai

ShenzhenSingapore

Tokyo

Europe

Amsterdam

Athens

Barcelona

Berlin

Bilbao

Birmingham

BratislavaBristol

Brussels

Bucharest

Budapest

Dublin

Frankurt

Glasgow

Helsinki

Istanbul

Kiev

Lille

Lisbon

London

Madrid

Manchester

Milan

Moscow

Oslo

Paris

Prague

RomeStockholm

Strasbourg

Vienna

Vilnius

Warsaw

Zeist

Zurich

Latin America

Bogot

Buenos AiresLima

Mexico City

San Jos

Santiago

So Paulo

Middle East

Dubai

Riyadh

Tel Aviv

North America

Atlanta

Boston

Calgary

Chicago

Dallas

Edmonton

Haliax

Kansas City

Los Angeles

MontrealNew York Metro

Ottawa

Philadelphia

Regina

San Francisco

Toronto

Vancouver

Washington DC Metro

Pacic

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Perth

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Documents

Top Executive Compensation in Europe