Despite shareholder dissent, directors of blue-chip giants see their pay increase by 2.5%.
After the FTSE 100 (UKX) index peaked at an all-time closing high of 6,930 on 31 December 1999, this century so far has been a poor one for UK investors.
Down goes the Footsie
As I write, the blue-chip index stands at 5,825, down over 1,100 points, or almost a sixth (16%), nearly 13 years since its peak. In 'real' terms (adjusting for inflation), the Footsie has dived roughly two-fifths (40%) since this millennium began. Even after adding in yearly dividends, many investors in UK shares will have made a small loss since the 'Roaring Nineties'.
Up goes director pay
With share prices 40% below their peak in real terms, you'd expect director remuneration to have fallen over this period, right? Wrong, because thanks to a 'ratchet effect', executive pay has soared to new heights this century.
Director remuneration rose most steeply during the credit-fuelled boom of 2000 to 2007. Although the global financial crisis of 2007-09 did curb executive excess, it has since resumed its 'upwards only' trend.
According to the latest report into executive pay from accountants Deloitte, the average pay rise for FTSE 100 directors was 2.5% this year. This follows an average rise of 3% last year. Notably, a third of executives got no increase in 2012, versus a fifth in 2011. Then again, bonuses as a percentage of salary were higher in 2012 than in any other year apart from 2011.
Deloitte also noted that nearly half of FTSE 100 chief executives (43%) and almost a quarter (23%) of directors own company shares worth at least five times their salaries. However, Deloitte notes that the proportion of bonus schemes with claw-back arrangements has soared to 61%, versus 36% last year.
Nevertheless, directors persist in awarding themselves an over-generous slice of shareholders' profits. Thus, Deloitte argues that there is no room for complacency, despite improvements to the structure of executive compensation.
The shareholder spring
Although Footsie boardroom pay is still creeping up, these latest rises are tiny in comparison with pre-boom pay hikes. Financial pundits are quick to attribute this to an investor backlash dubbed the 'shareholder spring' (a nod to the democratic uprisings in the Middle East and North Africa dubbed the 'Arab Spring').
However, Deloitte's research suggests that this shareholder spring "was not a universal protest movement". Indeed, only two companies failed to gain 50% of votes in favour of executive pay packages. With 100 firms in the blue-chip index, the shareholder spring actually proved to be something of a damp squib!
Even so, Deloitte warns: "It is clear that shareholders have been more vocal and prepared to mount a strong challenge where they feel remuneration is not consistent with how the shares have performed."
The backlash against banks
Nowhere has shareholder revolt been more vocal than in the banking sector. Following huge taxpayer-funded bank bailouts in 2008-09, public resentment against bankers is at record highs. Hence, bank chief executives and chairman got roasted at this year's Annual General Meetings (AGMs).
At Barclays (LSE: BARC), then-CEO Bob Diamond and then-chairman Marcus Agius got a roasting from shareholders fed up with the bank's falling share price and lower dividends, while complaining that pay continued to remain sky-high within investment bank Barclays Capital.
At Barclays' AGM on 27 April, only 73.1% of votes cast approved the bank's remuneration report for 2011, with 26.9% of votes cast against. Following this slap on the wrist, worse followed for Diamond and Agius, as both were forced to resign following the bank's multi-year manipulation of key interest rate Libor.
Another bank under the cosh this year was mega-bank HSBC (LSE: HSBA). At its AGM on 27 May, 10.2% of votes cast were against the approval of the bank's 2011 remuneration report. Notable among executive payouts was the £7.2 million awarded to CEO Stuart Gulliver.
Royal Bank of Scotland (LSE: RBS), which is 82%-owned by taxpayers, also came in for criticism from disgruntled shareholders at its AGM on 30 May. Even so, 99.7% of votes cast approved its remuneration report, with the government's majority shareholding carrying the day. Also, RBS CEO Stephen Hester was agreed to have "done the right thing" by refusing to accept a bonus for 2011.
Two victims of the 'shareholder spring'
Though heads rolled at Barclays this year, these came in response to the bank's blatant market manipulation, not following shareholder votes. Nevertheless, two FTSE 100 chief executives did fall on their swords this year, due to shareholder protests over executive pay and performance.
First went AstraZeneca (LSE: AZN) chief executive David Brennan, who decided to retire on 1 June after running the pharmaceutical giant since 2006. This followed a 38% dive in first-quarter profits and a sustained campaign by major shareholders pressing for changes to the board. Of course, Brennan didn't leaving empty-handed, as he walked away with a £4.4 million windfall. Chairman Louis Schweitzer also left the FTSE 100 firm in June, three months ahead of plan.
Second to depart was Andrew Moss, CEO of insurance behemoth and high-yield favourite Aviva (LSE: AV). Despite diplomatically declining a 4.6% pay rise to keep his basic pay below £1 million, Moss failed to convince institutional investors of the merits of the insurer's executive pay, with 54% voting against its remuneration report.
On 8 May, Moss stepped down, armed with a £1.5 million payoff. To find and appoint Moss' successor, John McFarlane moved up to become executive chairman from 1 July. As I wrote that month, McFarlane quickly began wielding the axe at Aviva.
Binding votes on pay
Looking ahead to next year, changes to remuneration disclosure and the introduction of a binding vote on remuneration policy should come into effect in late 2013. As a result, Deloitte expects executive pay to "remain at the top of shareholders' agendas for the foreseeable future".
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> Cliff does not own any of the shares mentioned in this article.