Executive salaries remained relatively flat across Europe over the past year, while bonuses continued to rise significantly, according to a new report from Hay Group.
Executive bonuses rose 10.5 per cent across Europe as firms placed greater emphasis on performance-related pay to drive growth in a difficult market, found Top Executive Compensation in Europe, which surveyed 312 organizations.
This trend was most pronounced in Switzerland, where total cash (base pay plus bonus) rose 12.5 per cent while base salaries in the country grew just 0.7 per cent.
The study also found that 60 per cent of executives Europe-wide were paid at least their target amount of bonus — indicating the majority of companies see themselves as performing above expectation or that target setting remains difficult in a volatile environment, said Hay Group.
“Companies are realizing they can’t continue to ratchet up executive pay by setting reward solely against market data,” said Carl Sjostrom, director of executive reward for Europe at Hay Group. “As recovery stutters across Europe and regulators and shareholders demand greater transparency, this position is simply no longer tenable.
“Companies must consider the business case of reward — the expected returns of their investment in executive talent — rather than measure up to an arbitrary percentile. Data should be used as a map of the current pay environment, not as a price list.”
The challenging business environment, and increased scrutiny on executive pay, had a significant impact on how European firms structured their executive reward packages over the past year, with below-inflation base pay rises witnessed in the United Kingdom, France and Italy.
German executives enjoyed the highest fixed pay increases as new regulations restricting bonuses, and strong economic performance, caused base salaries to rise 4.2 per cent, found the report.
U.K. executives’ base pay rose modestly — in line with the British workforce as a whole — at just 2.2 per cent.
Fixed pay in Italy and France remained effectively flat as greater regulation and disclosure requirements, a surge in shareholder activism and general austerity due to a depressed market made meaningful salary rises unacceptable.
“An unintended consequence of regulation has been the increasing separation of executive pay from the development and evolution of corporate strategy,” said Sjostrom. “Some companies have been so swamped by regulation that they have become preoccupied with compliance, at the expense of strategy. This is clearly counterproductive to achieving responsible reward, aligned with the company’s strategy.”
Over the past 12 months, the value of long-term incentives as a proportion of overall executive compensation grew significantly across European firms, according to Hay Group.
Long-term incentives now make up 33 per cent of the total direct compensation packages, compared with 25 per cent in 2010. More companies, particularly in the banking sector, are using mechanisms such as deferred bonuses (72 per cent of banks compared to just 44 per cent last year) and accompanying clawback provisions.
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