Base salaries for top executives at large European companies stagnated in 2010, with the median base salary across the continent falling 1.2 percent behind inflation. At the same time, bonus payments for top executives rose, often resulting in an overall increase in executive compensation, according to a report by Hay Group, Top Executive Compensation in Europe.
Only in Belgium, Russia, Spain and Switzerland did base salary increases beat inflation, according to the report, which examines data for 257 companies from the Financial Times Europe 500 over the previous 12 months.
While top executives’ base salaries fell in real terms across most European countries, their total cash remuneration increased in eight of the 11 countries; mainly as a result of annual cash bonuses recovering. The exception was in the Netherlands, with bonuses at Dutch companies falling by 7 percent.
“Many had expected that the banking crisis and the recession would prompt a fundamental shift in top executive pay. In reality, most changes have been incremental," commented Simon Garrett, a director with Hay Group.
Short-Term Incentive Targets Lower
"The changes to bonuses that we are seeing seem to be driven by the understandable fear that an unobtainable bonus would not motivate executives," Garrett added. "As a result, many companies revised their short-term incentive performance targets downwards to reflect the difficult market conditions—in many cases without reducing the amounts payable for target performance. Achievement of these targets has therefore resulted in the restoration of pre-recession bonus payouts."
An exception to this trend was in the Netherlands, with bonuses at Dutch companies falling by 7 percent—often to support board arguments for broader corporate pay restraint or because companies were bailed out with public funds and subject to regulatory restraints."There may also be a cultural shift in the Netherlands against top executive bonuses and it will be interesting to see if such a trend is sustainable once the European economy starts to thrive again," said Garrett.
Value of Long-Term Incentives Fall
The research shows that long-term incentives (LTIs) continue to make up a substantial part of executive pay across Europe. However, the value of awards fell in 2010. Switzerland, Italy and the U.K. provided the highest proportion of LTI at the CEO level, with Sweden and Norway providing the least.
“When it comes to LTIs, many shareholders have argued, with some success, that continuing to make awards of the same value could result in a windfall opportunity for executives," Garrett continued. "For example, if the award is made when the share price is depressed and it later recovers to ‘normal’ levels, the executive makes an undeserved profit and therefore awards should be scaled back accordingly. It seems as though many companies have taken this message to heart," he added.
“We believe that, now more than ever, remuneration committees need a clear understanding of the interaction between reward and corporate strategy, and the value gained from compensation paid to top executives," Garrett emphasized. "Without this understanding, a sustainable long-term approach to executive compensation cannot succeed. Boards now have no choice but to treat executive pay as a strategic tool if they want to excel in an increasingly competitive market.”
Stephen Miller is an online editor/manager for SHRM.
Global Salary Increase Budgets for 2010 and 2011, SHRM Online Compensation Discipline, September 2010
Bonuses Are Back, with Emphasis on Hard Measures, SHRM Online Compensation Discipline, July 2010
Companies Worldwide Rewarding High Performance with Variable Pay, SHRM Online Compensation Discipline, March 2010
SHRM Online Compensation Discipline
SHRM Salary Survey Directory
SHRM Compensation Data CenterSHRM Metro Economic Outlook reports