This is the second in a series of articles focusing on trends in the remuneration of directors of companies in the FTSE 250 (excluding inves...

This is the second in a series of articles focusing on trends in the remuneration of directors of companies in the FTSE 250 (excluding investment trusts). Information is taken from annual reports accounts published before 30 June 2005 and, in the case of long-term incentive plans also includes
information from shareholder communications on new plans put forward for approval at AGMs up until early July 2005.

Last month the first of this series of articles focusing on directors remunerationin FTSE 250 companies considered the remuneration environment which has existed over the last year and then provided a high level summary of the recent trends.

In this article we have focused in more detail on annual
incentive plans. In subsequent articles
we will focus in more detail on deferred bonus plans, long-term incentive
arrangements and on non-executive directors’ remuneration.

Annual
incentives

All but four FTSE 250 companies have an annual incentive
plan in place in which executive directors are eligible to participate.

There is no requirement under the Directors’ Remuneration
Report Regulations to disclose the details of annual incentive plans but best
practice guidelines such as those produced by the ABI and NAPF make it clear
that investors would prefer to see an upper limit in place and that this should
be disclosed. The majority of companies now disclose the maximum that can be
earned under these plans and uncapped plans appear to be decreasing. In many cases the performance measures on
which the plan is based is also disclosed.

Only 4 per cent of FTSE 250 companies do not disclose the
maximum and a further 11 per cent appear to have no limit, compared to 12 per
cent last year.

Target and maximum awards

In FTSE 250 companies target award levels have not changed
significantly this year but the maximum that may be earned has increased
significantly. For the first time since
we have been analysing the data, the median maximum award is the same in FTSE 250
companies as it is in FTSE 100 companies, at 100 per cent of salary.

Over the past year 35 FTSE 250 companies increased the
maximum award that could be earned, compared to 37 over the previous period. In
some cases the additional amount of bonus may be awarded in deferred shares.

The following table indicates the quartile range of
on-target and maximum awards that may be earned, shown as a percentage of basic
salary. The percentages relating to target awards are based on a smaller sample
of companies providing this information.

	Target award % of salary	Maximum award % of salary
Upper quartile	50%	100%
Median	40%	100%
Lower quartile	30%	60%

It is important to note that the percentages given in the
above table include any deferred element although we have excluded any matching
shares that may be awarded based on continued employment or performance over
the deferred period. To that extent the
numbers overstate the potential cash bonus that may be paid.

The upper quartile, median and lower quartile maximum cash
bonus that can be paid is 100 per cent, 70 per cent and 50 per cent
respectively. Where a participant is
invited to invest part, or all, of the award, usually with the opportunity to
receive further matching shares at the end of the deferred period, the total
bonus has been included as cash.

The chart below shows how the potential awards that may be
made to main board directors under annual incentive plans have been steadily
increasing over the past few years.

Annual incentive plans – maximum awards 2001/2002,
2002/2003, 2003/2004 and 2004/2005

There continues to be a significant number of companies
where the potential award is higher for the top full time executive than for
other main board positions. In FTSE 250 companies 16 per cent of plans have a
higher maximum for the top position compared to 18 per cent last year. In some
cases the finance director may also be included in the higher bracket.

Where there is a higher potential for the top full time
executive the bonus is likely to be 30 to 40 per cent higher than for other
main board directors.

Actual award levels in the last financial year

The table below
shows the range of actual bonus awards made in the last financial year as a
percentage of basic salary to all executive directors, excluding the top full
time position, and the range of target bonuses in place.

	Target award % of salary	Actual bonus % of salary
Upper quartile	50%	79%
Median	40%	50%
Lower quartile	30%	30%

The following tables show the range of bonus awards for
the top full time executive and all other executive directors.

Top full time
executives

Bonus as % of basic salary by market capitalisation

Market capitalisation £m	No of jobs	No of co’s	D1	Q1	Median	Q3	D9	Average
200 – 500	68	68	0.0%	28.6%	49.8%	85.7%	134.8%	95.2%
501 – 1,000	67	67	11.6%	30.7%	51.7%	76.0%	102.9%	64.4%
1,001 – 2,000	46	46	29.9%	49.9%	70.3%	95.0%	166.7%	111.7%
2,001 – 4,000	7	7	-	-	58.4%	-	-	75.4%
All	189	189	16.1%	32.3%	56.5%	83.4%	126.6%	87.3%

All other executive
directors

Bonus as % of basic salary by market capitalisation

Market capitalisation £m	No of jobs	No of co’s	D1	Q1	Median	Q3	D9	Average
200 – 500	178	68	16.0%	28.1%	48.2%	79.5%	134.2%	80.4%
501 – 1,000	168	72	1.0%	25.0%	47.8%	68.0%	122.7%	76.1%
1,001 – 2,000	134	53	26.8%	39.8%	64.7%	99.8%	197.0%	94.6%
2,001 – 4,000	16	7	-	-	57.5%	-	-	56.1%
All	496	200	14.1%	30.0%	50.4%	79.5%	148.9%	82.0%

In the above tables the actual bonuses paid to executives
in the past year are shown as a percentage of basic salary. Since each company
may have a different bonus potential, these tables do not provide any
indication of how close the actual payments are to the maximum that may be
earned. This relationship is examined in the table below.

For each company we have taken the average incentive award
paid to all main board directors in the past year and calculated this as a
proportion of the maximum that may be earned in that company.

The table shows that the number of companies where no
payments were made under the annual incentive plan continues to decrease in
FTSE 250 companies.

Annual bonus – average awards as % of plan
maximum

	2002/03	2003/04	2004/05
Upper quartile	89%	91%	93%
Median	53%	64%	70%
Lower quartile	15%	28%	40%
No award made (% of companies)	15%	11%	8%

Performance measures

There has been no significant change in the performance
measures on which annual incentive payments are based. The number of plans
based on profit (typically group profit for the chief executive, finance
director and other group positions, but may include an element of divisional
profit for the heads of subsidiaries and divisions) has increased slightly and
is still by far the most common measure.
However there has also been a slight increase in some of the other
measures used.

Annual bonus plans –
performance measures

Pensionability of annual incentive
payments

There are very few companies where the bonus payment is
pensionable and where this is the case, the bonus payment is usually only
pensionable in part, or the practice only applies to existing directors, with
new appointments on different terms. In
addition to this there are some companies where the bonus is pensionable for US
directors which is in line with market practice in the US.

Overall, in 5 per cent of FTSE 250 companies, at least
part of the annual bonus is pensionable for at least some of the directors.

Conclusion

We believe that companies will come under increasing
pressure to disclose more information than in the past concerning the extent to
which performance conditions have been satisfied and remuneration committees
may face challenges where they use discretion to award bonuses which do not
appear to be unjustified by the results.
In addition, the shareholders will continue their increased focus on
annual incentive plans challenging arrangements which do not appear to them to
adequately link pay to performance.

Ensuring that annual incentive plans are properly
structured will therefore continue to be high on remuneration committees’
agendas. The next article in this
series will focus on deferred bonus plans which are now operated by 44 per cent
of FTSE 250 companies and therefore are increasingly a key part of the
remuneration package of directors of FTSE 250 companies.