The structure of the UK plc boardroom is shrinking as the ‘Higgs effect’ has seen the number of executive directors of FTSE companies fall by 20 per cent since 2002.
According to a report by Deloitte, the number of executive directors on main boards dropped by 6.5 per cent this year as businesses respond to the Higgs report by cutting the number of executives faster than they add non-executive directors.
Carol Arrowsmith, head of the remuneration team at Deloitte, said: “FTSE 350 companies are striving to achieve the boardroom equilibrium recommended by Sir Derek Higgs, but not in the way many people expected.
“By reducing the number of executive directors, companies are striking a better balance between executive and independent board members, and at the same time making the boards less unwieldy.”
There is still a huge gender imbalance in the boardroom. There has been no increase in the number of female executive board members, and only a 1 per cent increase in the number of female non-executive directors. Women only make up 3 per cent of executive directors and 10 per cent of non-executive directors across the FTSE 350.
Meanwhile, salaries for executive board members have risen by 6.8 per cent – significantly ahead of increases in pay for the overall workforce, which stand at a seasonally adjusted 3.9 per cent.
Bonus payments have risen since last year, particularly in the FTSE 250 where the average payout was 60 per cent of salary compared to 50 per cent of salary last year. In FTSE 100 companies the average was 75 per cent compared to 71 per cent of salary last year.
Bill Cohen, partner and remuneration specialist at Deloitte, said: “While these higher bonus payouts may raise eyebrows, it is important to look at the performance of the FTSE which, over the same period, increased by 18 per cent compared to 9 per cent the year before. However, it is always important to ensure that annual incentive plans support the business strategy and have appropriately stretching targets.”
Although salary and bonus payments have risen, more companies have stopped granting share options to executives.
Only 28 per cent of FTSE 350 companies regularly grant options to executive directors compared with 79 per cent three years ago.
In most cases traditional share options have been replaced with performance shares or matching shares awarded on the deferral of bonus payments, or a combination of both.
There has also been a decrease in the number of companies awarding both share options and performance shares to executives in the same year with 27 per cent of FTSE 100 companies doing this compared to 47 per cent last year and 17 per cent of FTSE 250 companies compared to 21 per cent last year.
Executive pension arrangements have been under scrutiny over the past year with companies and investors keen to see developments in market practice following A-Day.
For new appointments, the answer seems to be simplified arrangements with more companies offering defined contribution plans or a cash allowance which can be paid into a personal pension.
The most common approach for executives with existing defined benefit arrangements who are impacted by A-Day seems to be for the individual to opt out of the pension plan and take a salary allowance instead.
It’s still early days and in many cases the size of the salary allowance has not been disclosed, although it seems to be in the 20-40 per cent bracket. Deloitte expects full disclosure next year.
