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Charting
your own
course
Re-evaluating
reward
Top Executive Compensation
in Europe 2013
There is now clear evidence across Europe that the continent is on
the road to recovery. This creates a serious challenge for corporate
boards: how can companies keep a lid on pay rises for their critical
people while attracting and retaining the talent needed to capitalise
on market opportunities?
As pressure builds in the reward system we expect to see increasingly
diverse pay practices and more people moving between companies.
The challenge for organisations is to design reward that is truly
fit for purpose. Only by focusing on their own strategic goals and
establishing the business case for reward can companies navigate a
route to take advantage of talent and growth.
www.haygroup.com/executivereward
Key trends
The shadows of regulation
Carl Sjöström, Regional director of reward services
for Hay Group Europe, discusses the key trends
and developments in European executive pay over
the past 12 months. This summary is based on the
findings as detailed in Hay Group’s study of Top
executive compensation in Europe 2013.
Top Executive Compensation in Europe 2013 is the most
comprehensive study of European executive reward
available. It analyses compensation data from 332
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. The report is based on the latest available
data from 2013 and all data are provided in Euros,
calculated according to the average daily exchange rate
over 2012.
To purchase the full study, or for more information,
please speak to your local Hay Group contact or e-mail
your request to: [email protected].
Regulation is stabilising but continues to
influence reward.
Five years on from when the Lehman Brothers’ demise heralded the worst
financial crisis since The Great Depression, commentators are beginning to speak
in optimistic terms about the future. For many large European companies, the
consequences of the credit crunch for executive reward were unprecedented;
an explosion of regulatory demand fuelled by public outcry and political
opportunism. In the past year alone, France has raised the tax on equity-based
incentives, Germany has revised its code on corporate governance, the United
Kingdom has introduced a binding vote on policy as well as new disclosure
requirements, and Switzerland is coping with the aftermath of the “Minder
initiative” vote. The results of this referendum will mean that Switzerland not only
catches up with the tightened regulatory controls of other regions, but overtakes
the rest of the European field in the regulation stakes. However, as our latest study
shows, the regulatory environment is beginning to stabilise–even the financial
services sector has become decidedly calmer–and this situation is likely to realise
further improvement once the consequences of the latest instalment of the
European capital requirements directive (“CRD IV”) have been accounted for.
Yet regulatory changes are by no means complete. Several European countries are
heading towards, or just emerging from, general elections and with the arguments
around social inequality, executive reward is a tempting target for attack.
Furthermore, a greater accent is being placed on the social divide in the form of
diversity–our study’s sample contains less than 8 per cent female executives, a
figure that would have been far lower had it not been for the Nordic countries
where the percentage of female executives ranges from 15 to 26 per cent.
Most countries in Europe still see
relatively little interaction between
investors and companies –
typically to the cost of
effective incentive plans.
www.haygroup.com
7 Top executive compensation in Europe 2013
Design demands attention
Taking action on talent
Companies are under pressure to design simpler
incentive plans.
Talent-related tensions mount between investors
and business leaders.
Investors are beginning to understand that detailed corporate governance codes, combined
with regulatory requirements, have led to a raft of complex remuneration designs that need
to be fully understood before they are voted on. As a result, there is a trend towards pressuring
companies to adopt simpler designs, a move that is being met with little resistance from
incentive plan participants. However, there are further implications; companies will need to
understand how to navigate not only the design itself, but also the nuances of managing
investor relations. We’ve found that most countries in Europe still see relatively little interaction
between investors and companies – typically to the cost of effective incentive plans.
Aside from pension solutions, contrary to a decade ago, there is barely any appetite
for designing reward solutions from a tax planning perspective, nor is there a
desire to confront public opinion on the matter of executive pay with business
logic and financial reasoning. However, we are concerned that as the green shoots
of economic recovery are beginning to emerge, companies will struggle to attract
the talent needed to capitalise on their improving fortunes. Many investors are
recognising this emerging problem as the employment market for top senior
talent picks up, but the majority of companies remain unwilling to discuss
alternative reward solutions and would rather simply conform to set guidelines,
codes and regulations to avoid any confrontation. We expect shareholders to
challenge companies far more on this reluctance to take action, with the result
being increased conflict between different investor groups. Investors are diverse
in their goals, timelines and outlooks and as more long-term investors begin to
question “tick-box” approaches to governance, companies will need to address
the discrepancies between what is desired and what needs to happen in practice
through better communications and clearer business arguments.
Until now, most of the attention in the marketplace in matters of reward has been focused on
the disclosure of executive pay and design of incentives. However, executive pension plans are
ever-present as one of the most costly, complex and political areas of executive reward. We expect increased attention to be focused on these pension plans in many countries,
especially as tax legislation becomes less generous. The fact remains that there are still many
rich legacy plans in place throughout Europe, but very few companies are offering them up to
new hires. Hence, the benchmarking of pension plans needs more accurate examination when
seeking interpretation, as what the market pays does not necessarily reflect what the market
offers. Other legacy issues that are likely to gain more attention in the near term are contractual
arrangements, termination payments and the effect on reward when there is a capital event,
such as a change in control. Recent scandals have been all about small details with large effects
and companies should ensure that their boards are aware of remuneration risks in the same way
as with other strategic or operational risks.
Courting compliance and change
Companies are adopting a holistic approach to
their reward strategies.
The biggest technical challenge for companies continues to be an exaggerated
focus on compliance at the expense of strategic reward. However, increasingly,
companies that have managed to avoid sacrificing one for the other are coming to
the realisation that benchmarking against market data is not the only important
reference point. Understanding how a reward strategy compares in the market
requires assessment of the context of the reward package: how it aligns to a
company’s strategy, structure and culture, as well as giving due consideration to
the risk–a Euro of value delivered in the future is not necessarily perceived to be
worth a Euro today. If organisations aim to take advantage of the predicted upturn
in the market, they should not just follow the crowd in designing reward packages
but establish the business case for reward and how to ensure its success.
©2012 Hay Group. All rights reserved
www.haygroup.com
9 Top executive compensation in Europe 2013
Another year of cautious
salary increases
The cautious approach to pay continues.
Percentage
Percentage
Figure 1: Median year-on-year per cent growth in base salary (same job, same incumbent)
5
4
5
3
Europe
4
2
3
Europe
1
2
UK
There are some clear geographic differences, although far less pronounced than
in previous years. France, Germany, Italy and Spain, for example, all saw a zero
change in salary at the median with the most notable movement being in the
Netherlands, where the median salary increase was 3.4 per cent. However, this
was not enough to move the Dutch median up from among the lowest of the
larger economies2.
UK
Switzerland
180
The Netherlands
The Netherlands
Sweden
Spain
Italy
Germany
France
0
Switzerland
Sweden
Spain
Italy
Germany
1
France
0
The trend for low salary increases established over the past few years continued
for 2013, where we saw a median increase of 2.5 per cent. This increase compares
to 2.0 and 2.6 per cent increases in 2012 and 2011 respectively and is aligned
with the European inflation rate of 2.6 per cent1. Clearly, European corporate
boards are continuing to make sure that executive base pay does not stand out
against other economic indicators.
The trend for low salary increases
established over the past few
years continued for 2013,
180
140
where we saw a median increase of
per cent.
160
120
140
100
2.5
Europe
UK
Europe
UK
The Netherlands
The Netherlands
Switzerland
Switzerland
Sweden
Sweden
Spain
Spain
Italy
Italy
France
80
Germany
100
Germany
120
80
France
Percentage
Percentage
Figure 2:160
Country median base salary as percentage of European median
1
Source - Eurostat.
2
It should be noted that the sample represents 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 Hay Group executive reward study.
©2013 Hay Group. All rights reserved
www.haygroup.com
11 Top executive compensation in Europe 2013
Short-term incentives
Short-term incentive payments made for 2012/2013 performance were marginally
more positive, with 48 per cent of our sample receiving an increased payment and
45 per cent registering a decrease. In 2011/2012, 44 per cent of the sample received
an increase and 46 per cent a decrease. At the median, there was no change in
target bonus opportunity and actual payouts fell with about one in ten executives
receiving no short-term incentive payment for the year.
Deferred bonuses
The rise of the deferred bonus, which was promoted through
regulatory changes to reward in the financial services sector
following the financial crisis, now seems to have plateaued. Just
over 41 per cent of the companies surveyed this year have a
compulsory deferral period for part of their bonus payouts.
Figure 3: Short-term incentive payouts against targets
2011/2012
2011/2012
2011/2012
2012/2013
2010/2011
2010/2011
2010/2011
Table 1: Percentage of companies with compulsory bonus deferral
45%
48%
46%
46%46%
44% 44%44%
32%
8%
7%
10%
10%10%
60%
32%32%
60%60%
2012
2011
2010
2009
41%
43%
33%
25%
19%
8% 8%
■ Same as previous year
■ Increased
■ Increased
■ Increased
■ as
Same
as previous
■ Same as■previous
year
Same
previous
year year
■ Increased
■ Increased
■ Increased
■ as
Same
as previous
■ Same as■previous
year
Same
previous
year year
■ Decreased
■ Decreased
■ Decreased
■ Decreased
■ Decreased
■ Decreased
■ Decreased
■ Increased
2013
The rise of the deferred bonus
now seems to have plateaued at
just over 40 per cent of companies.
©2013 Hay Group. All rights reserved
©2011
www.haygroup.com
13 Top executive compensation in Europe 2013
Total cash
Although levels of total cash, the sum of fixed salaries and short-term
incentives, have begun to move up again at a median year-on-year increase
of 2.0 per cent, they are not out-pacing salary movements. Last year, the total
cash median increase was 0.8 per cent and none of the major countries in the
study showed a median total cash increase of more than 1 per cent. However,
this year the picture is far more mixed. In France, Germany and Switzerland
median increases were above 3 per cent, outpacing GDP growth, whilst in Italy
and the United Kingdom the median total cash dropped.
Figure 5: Country median total cash increases versus gross
domestic product (GDP) and inflation
8
6
4
UK
The Netherlands
UK
Spain
0
The Netherlands
France
-8
Switzerland
UK
The Netherlands
Switzerland
Sweden
Spain
Italy
Germany
France
-10
3
Italy
100
6
-4
Europe
-6
Germany
Europe
Switzerland
9
2
Europe
-2
France
Percentage
4
12
0
Italy
6
15
Europe
Europe
2
Germany
Percentage
8
Percentage
Figure 4: Country median total cash as per cent of European median
n
Growth
n
GDP
n
Inflation
Sources: Hay Group, Eurostat
The proportion of companies with a
long-term incentive plan has increased
per cent of the sample
from
to
per cent.
78
©2013 Hay Group. All rights reserved
©2011
84
www.haygroup.com
15 Top executive compensation in Europe 2012
Long-term incentives
Total direct compensation
The picture is largely unchanged from 2012 in terms of the types of long-term incentives
that large European corporates have in place. There are, however, two notable differences
this year. First, the proportion of companies with a long-term incentive plan has
increased from 78 per cent to 84 per cent. Second, as a result of this increased prevalence
and a median growth in expected award value of 8.5 per cent, long-term incentives have
become an even more important part of the executive reward mix.
Long-term incentive plans as a proportion of total direct compensation is at the median 34 per cent.
This is a significant change compared with past practice. As figure 6 shows, the European average has
been fairly consistent in the past, but today there is a clear shift towards more variability; in particular,
more long-term incentives are being included in the total package. With the increases in long-term
incentive awards, the total direct compensation median increase was 6.9 per cent for Europe.
Figure 6: Make-up of target total direct compensation
Table 2: Long-term incentive plan prevalence in Europe
2011
2011
2011
Stock option and
phantom
option plans
30%
Performance
shares/units
52%
Restricted
shares/units
9%
Long-term
cash plan
15%
No long-term
incentives
28%28%28%
2012
2012
2012
2013
2013
2013
29%29%29%
44%44%44%
16%
28%28%28%
44%44%44%
34%34%34% 39% 39%
39%
27%27%27%
27%27%27%
■ Base
salary
■ salary
Base salary
■ Base
■ Target
bonus
■ Target
■ Target
bonusbonus
■ Base
salary
■ salary
Base salary
■ Base
■ Target
bonus
■ Target
■ Target
bonusbonus
■ Base
salary
■ salary
Base salary
■ Base
■ Target
bonus
■ Target
■ Target
bonusbonus
■ Long-term
incentive
■ Long-term
incentive
■ Long-term
incentive
■ Long-term
incentive
■ Long-term
incentive
■ Long-term
incentive
■ Long-term
incentive
■ Long-term
incentive
■ Long-term
incentive
In addition, countries with a tradition of long-term incentives continue to pay higher rates than the
overall market when it comes to total direct compensation. Spain and Switzerland, both countries with a
propensity towards larger companies in their samples, top the league of highest-paying countries, whilst
Nordic countries are the most restrained. Overall, the median total direct compensation of a CEO for a FT
500 company in Europe was just above €3 million and that of other directors was just above €1.5 million.
Percentage
Figure 7: Median target total direct compensation as per cent of European median
180
160
140
120
Europe
100
80
©2012 Hay Group. All rights reserved
UK
The Netherlands
Switzerland
Sweden
Spain
Italy
Germany
France
60
www.haygroup.com
17 Top executive compensation in Europe 2013
Sector trends
National differences explain many of the variations in the
sample, however sector movements play an equal role in
driving our statistics.
Automotive
Last year’s high salary increases in the automotive sector did not continue. In
early 2012, Europe lost ground on growth in the sector with falling sales and many
European operations signalling restructuring activities. Having had the largest median
fixed salary increase of all the industry sectors last year, this year was flat and the sector
saw the largest drop in total cash as lower bonus levels brought a median decrease of
14.1 per cent.
Figure 8: Median year-on-year per cent growth by sector (same job, same incumbent)
13.8
Utilities and Energy
12
10
10
8
8
6
6
4
4
2
2
©2013 Hay Group. All rights reserved
2.6
0
Other
Utilities and energy
Transport
Services
Retail
Pharmaceutical
4.2
Oil and gas
Media
Insurance
4.3
Mining
1.2
Industrial
Chemicals
Consumer goods
ICT
0.4
14.1
Automotive
0
Banking and finance
Percentage
13.0
12
n
Growth in base salary
n
Growth in total cash
A “poor” European summer in 2012 followed by a cold winter allowed many utilities
and energy companies to perform far better than in the previous year. Base salaries,
which are typically strongly influenced by governments and regulators, only rose 0.6
per cent but the total cash increase was 10.6 per cent across the continent, reflecting
increased bonus payouts.
Banking
In spite of the industry having seen some positive developments in trading
results during 2012, public pressure, adjustments to accommodate the Capital
Requirements Directive IV and the redistribution of income streams have so far kept
remuneration increases low for the sector. Base salaries rose at the median by less
than 1 per cent and total cash by 1.2 per cent. However, the sector is now facing
a few difficult years as incentives are capped and there will be pressure to raise
salaries while restructuring revenues and costs. The true consequences are yet to be
understood, but are likely to begin with increasingly volatile pay.
www.haygroup.com
19 Top executive compensation in Europe 2013
Differences by role
Insurance
The insurance sector has not responded in the same way as the banking sector
to regulatory and market pressures. Having learned to live with the low interest
environment and helped by the improving performance of many stock markets
and fewer catastrophes during 2012, salaries increased by 4.1 per cent and total
cash by a highly significant 13 per cent.
Pharmaceuticals
Pharmaceuticals remains true to its traditional positioning as the highest paying
sector, despite recent rounds of strategic and structural change. The stock markets
have been favourable to pharmaceutical companies and pay has followed with a
median salary increase of nearly 8 per cent and total cash increasing by almost as
much. This sector is the “one to watch” and we expect compensation to change
as companies move from product centricity towards serving customer needs and
better alignment with stakeholders; for example, responding to the changing
attitudes and buying behaviours of governments.
As we saw in 2012, boards and their remuneration
committees continue to hold back Chief executive
officer pay increases. In 2013, CEOs received a
median salary increase of 1.1 per cent and a total
cash increase of 1.5 per cent.
However, with the added exception of Chief operating officers who have seen large
increases over the past couple of years, other executive director positions grew pay
significantly this year with total cash increases near or above 5 per cent.
Figure 9: Year on year per cent growth in base salary by role (same job, same incumbent)
Chief executive officer
Human resources director
Chief operating officer
Chief financial officer
Division head
0
1%
2%
3%
4%
n
Base Salary
n Total Cash
©2013 Hay Group. All rights reserved
©2011
5%
A final comment...
Reward design is more vital than ever as companies confront pressure from various
stakeholders to keep salary increases below that of other key talent groups and to
maintain simple and uncontroversial incentives. As markets pick up, following the
crowd is not an optimal starting point when re-engaging in the war for talent. In the
first instance, there is a danger in becoming an “also ran” with no distinct proposition
and no rationale linking behaviour, performance and reward. In the second instance,
using the safety valve of easier performance targets for incentives will not only
lose the proper pay-for-performance link, but also distort planning, budgeting and
strategy implementation.
For many years, investors have highlighted that one of the most significant
weaknesses of corporate governance is how boards deal with remuneration. If
poor management of executive reward through bad design or lacklustre decision
making is not to spark the next round of governance and regulatory interventions,
companies must differentiate themselves from the rest by being ready to reevaluate reward.
For further information
To purchase the full study, or for more information, please contact your
local Hay Group executive reward expert:
Europe:
Carl Sjostrom I [email protected]
The Netherlands:
Eric Engesaeth I [email protected]
Austria, Germany, Switzerland:
William Eggers I [email protected]
France:
Caroline Robard I [email protected]
United Kingdom:
Simon Garrett I [email protected]
Spain:
Sergio Perez I Sergio.Perez @haygroup.com
Italy:
Enor Signorotto I [email protected]
Belgium:
Walter Janssens I Walter. [email protected]
Nordics:
Juhani Ruuskanen I [email protected]
Turkey:
Serkan Sener I [email protected]
Alternatively, please email [email protected]
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