LONDON, UK – The 2010 FTSE 100 Directors' Remuneration report by Hewitt New Bridge Street, the UK's leading executive remuneration specialists, is the first comprehensive report on directors' pay data from the 2009/10 financial year. It shows that while FTSE 100 companies have continued to demonstrate some restraint when setting executive salaries – while also providing more transparent disclosure on the structure of packages and taking more account of "risk" - total actual reward packages have increased year-on-year driven by a rise in bonuses.

Rob Burdett, a principal consultant at Hewitt New Bridge Street, said:

"While the widespread salary freeze imposed in 2009 has thawed to a degree, the days of almost automatic year-on-year above inflationary salary increases for executives are numbered. Also, risk "audits" and greater transparency over executive pay have been embraced by many remuneration committees. However, bonuses paid this year have reached record levels, driven by the unexpected rate of improvement in economic conditions during the year."

Total reward
Executive remuneration is comprised of two key elements: fixed (typically comprising around 40% of the package) and variable pay (around 60%). The Hewitt New Bridge Street report shows the median total remuneration for the highest paid director in the FTSE 100 is just under £3 million (compared to £2.5 million last year). However, this increase was largely driven by changes to the constituents of the FTSE 100. Comparison on a like-for-like basis shows that total remuneration increased by only 4%.

Over a third of FTSE 100 companies have frozen salary levels this year (compared to 60% last year). While a decrease in salary freezes on a year-on-year basis, this remains high in a historical context, as traditionally base salaries were generally increased each year. Hewitt New Bridge Street's data shows that where salary increases have been made, the most common rate of increase is broadly in line with inflation.

Actual bonuses earned for highest paid directors in 2009/10 were around 120% of salary (compared to around 90% last year), or around 75% of the maximum potential (60% last year).

Rob Burdett said:

"These bonus levels have not been paid due to companies purposely setting soft targets. In fact, our experience suggested that when these targets were set in early 2009 they were actually set to be tougher relative to budgets, in order to take account of possible reduced profits. In fact, the economy and stock markets have recovered quite significantly, with companies recording stronger performance levels than envisaged. As a result of better than expected financial results, bonuses paid for performance in 2009 have increased considerably compared to 2008. Shareholders appear to have accepted the explanations provided by companies for these bonus levels, with few instances of open investor revolt during the recent AGM season. For example, there were fewer ABI "red tops" issued in 2010 compared to 2009 (although still more than 2008), and while the number of RiskMetrics "vote against" recommendations remained steady, there were fewer resolutions actually defeated.

"Shareholders may be deriving some comfort from the better performance of the markets. The fact that  65% of FTSE 100 companies now require part of the bonus to be deferred into shares, and the increasing number of companies requiring the bonus to be repaid (clawed back) if it is later found to have been paid on the back of misstated results, a practice which was virtually unheard of until recently."

Rob Burdett added:

"It will be interesting to see whether the Stewardship Code recently published by the Financial Reporting Council (FRC) – which is intended to enhance the quality of engagement between institutional shareholders and companies and will require investors to publish their voting policy - will encourage greater levels of shareholder intervention on pay matters."

Long term incentives
Fewer companies established new long-term incentive plans in 2009/10 than would normally be the case, although more than last year (a time when investors expected companies to concentrate on more pressing strategic operational issues given the economic uncertainty that prevailed). Therefore, most companies maintained their existing schemes, albeit ensuring that performance conditions applying to new awards reflected the new outlook.

Pensions
The most common pension provision for FTSE 100 directors is the sole operation of a defined contribution plan with the median company contribution at 20% of salary. However, potential changes to legislation and the impact of the June 2010 budget will impact on how companies plan their executive pensions.

Rob Burdett said:

"The evolving legislation on pensions is causing companies to review their existing provision. It is likely that changes in the tax regime to executive pensions are likely to require most thought and potential re-structuring of that element of pay, with a number of companies moving to simple cash supplements."

2011 and beyond
Hewitt New Bridge Street predicts that bonuses will continue to remain in the spotlight going into 2011. Target setting remains an issue and the level of disclosure provided by companies in relation to the operation of their annual bonus structure is likely to receive even further scrutiny.

Rob Burdett said:

"Shareholders have, perhaps grudgingly, been accepting of increasing annual bonus opportunities in the belief that the targets were being made significantly harder. However, in each of the past eight years, we have seen higher than target bonuses paid. This may make some question how tough the targets really are.

"Some commentators fear that a double dip recession could be around the corner and believe that the fundamentals have yet to return to the market. If the double dip does come, investors will expect this to be reflected in far lower  bonus payouts.

"Continued base salary moderation is likely, with few companies considering it appropriate to increase executive salaries at a faster rate than the workforce as a whole."

Rob Burdett added:

"Finally, we believe companies will continue to wrestle with how best to take account of "risk" when operating their annual bonuses and structuring their remuneration packages. The use of formal clawback provisions is expected to become more widespread, a trend we are already beginning to see. In any event, companies may feel the need to conduct a regular formal risk audit of their executive remuneration policies, where they stress test their pay practices."

Key Statistics
Base Salary

• Reflecting continued economic uncertainties, over 35% of FTSE 100 companies have frozen salary levels this year (compared to the salary freeze imposed by 60% of companies last year).
• The median salary of FTSE 100 Highest Paid Directors is £823k.  The corresponding figures in the FTSE 30 and 31-100 are £1.06m and £770k respectively.
• The median salary of FTSE 100 Finance Directors is around £490k and other Executive Directors around £460k.

Annual Bonus

• While the median annual bonus potential for Highest Paid Directors is around 180% of salary (broadly the same as last year), the most common potential is 200% of salary (compared to 150% of salary last year).  The median potential for Finance and Other Directors remains at around 150% of salary.
• Actual bonuses earned in 2009/10 were around 120% of salary (or around 75% of the maximum potential).  This compares to around 90% of salary or 60% of the maximum paid last year.  
• Over 65% of companies require part of the bonus to be deferred into shares for a period of time (typically three years), up from 60% last year.  
  Long-Term Incentives
• The most common approach adopted by companies is to only operate a Performance Share Plan (over 45% of companies).  Only around 15% of the FTSE 100 as a whole have a policy of granting options (compared to around 80% in 2003 and 22% last year).
• FTSE 100 Highest Paid Directors typically received long-term incentive awards last year with an 'expected value' of around 145% of salary, which broadly equates in face value terms to an award of 265% of salary under an LTIP. These figures are broadly similar to prior year grant levels.
• As has been the case for a number of years, EPS and TSR remain the most common measures used in long-term incentive arrangements.
• Over 80% of companies have a formal shareholding guideline.  The median level of shareholding required is 200% of salary for the Highest Paid Director and 125% of salary for other Executive Directors.

Pensions

• The most common pension provision is the sole operation of a Defined Contribution plan, which is offered to 40% of newly appointed Directors. However, nearly a third of new Directors received cash supplements.
• The median contribution to a Defined Contribution plan is around 20% of salary, whilst the median cash salary supplement is around 30% of salary (although the difference in contribution rates between these two types of arrangements is due to the constituent companies). 
  Total Remuneration
• Target total remuneration for Highest Paid Directors is around £3m, up from £2.5m in the previous year.  However, this increase is largely driven by the higher remuneration levels of new FTSE 100 entrants.  On a 'matched sample basis' target total remuneration increased by only 4%.  For Finance Directors and Other Directors total target remuneration is £1.7m and £1.6m respectively (largely unchanged from the prior year). 
  Balance of Package
• Variable pay (i.e. annual bonus and long-term incentives) accounts for around 55%-60% of a typical FTSE 100 Executive Director's remuneration package (compared to only 45% in 2003).  
• Approximately 65% of variable pay now relates to long-term performance (compared to around 50% in 2003).  
• However, FTSE 30 CEOs packages are more highly geared, with around 70% of their package performance-linked.

Service Contracts

• Service contracts containing notice periods of 12 months are now the norm.  Less than 10% have notice periods of less than 12 months.
• Around 25% of contracts have liquidated damages clauses.  Of these, around 40% include bonus in the calculation of termination payment.
  Non-Executive Directors
• The median Non-Executive Chairman's fee is around £325,000. 
• Typically, fees for other Non-Executive Directors (NEDs) range between £65,000 and £90,000 depending on their role.  
• There has been no discernable rise in NED fees over the prior year.

Methodology
The FTSE 100 has been 'struck' as at 30 June 2010.  The median market capitalisation of the Index as a whole is £5.5bn.  The FTSE 30 has a median market capitalisation of £31bn and the FTSE 31-100 of £3.8bn. 

The Executive Director data has been sourced from public disclosures in Report & Accounts and circulars and includes all March 2010 year ends.  Data has been provided for the:

• Highest Paid Director - either the Chief Executive or the full-time Executive Chairman;
• Finance Directors; and 
• 'Other Directors' - i.e. other main board Executive Directors, excluding Chief Executives, Executive Chairmen and Finance Directors.  These 'Other Directors' have been split between 'Functional' roles (e.g. HR, Legal) and 'Operational' roles (e.g. Heads of Divisions). 

Data on Executive Committee roles has been taken from our participatory 'Executive Total Reward Survey'. 

Target total remuneration has been calculated on an 'expected value' basis.  By this, we mean that a value has been attributed to each element of an executive's package.  The table below sets out the assumptions used to calculate total remuneration.  Only executives who have been in post throughout the relevant financial year have been included.

Calculating Target Total Remuneration

About Hewitt New Bridge Street   
Hewitt New Bridge Street is the UK's leading executive remuneration consultancy that is the named adviser in the Director's Remuneration Reports of around one third of  FTSE 100 companies and and over 40% of FTSE 250 companies. We have a single focus — to assist companies design and implement executive remuneration practices which will help them meet their business objectives.

About Hewitt Associates
Hewitt Associates (NYSE: HEW) provides leading organisations around the world with expert human resources consulting and outsourcing solutions to help them anticipate and solve their most complex benefits, talent, and related financial challenges. Hewitt works with companies to design, implement, communicate, and administer a wide range of human resources, retirement, investment management, health care, compensation, and talent management strategies. With a history of exceptional client service since 1940, Hewitt has offices in more than 30 countries and employs approximately 23,000 associates who are helping make the world a better place to work. For more information, please visitwww.hewitt.com