Deloitte, the business advisory firm, has today launched details from a report looking at board structure and directors’ remuneration of companies on AIM. The trend for 2008 was for salary increases of AIM executive directors to be higher than their counterparts in the FTSE 250 and FTSE SmallCap at 11.4.%, but there is already evidence of lower increases in 2009.
James Ferguson, capital markets partner, at Deloitte comments: “The trend for continuing salary increases for directors in AIM companies is not one we expect to continue, and in the coming year we anticipate that in many companies there will be zero increases for executives, reflecting the current economic downturn.
“Although the potential annual bonus that may be earned has increased from 75% to 100% of salary in AIM companies and is now the same as in the FTSE 350 companies, the level of actual bonus paid has remained similar to last year, with payments of 44% of salary in 2008 compared to 48% in 2007. However, it seems likely that bonus payments for current financial periods will be below target and may be close to zero in many companies.
Don Sutherland, remuneration associate partner at Deloitte, comments: “Share options continue to dominate incentive policy in AIM companies, but our research suggests that even here the use of options is declining and our own experience with AIM companies suggests that changes in accounting rules are influencing remuneration policy†. 70% of companies now operate a share option plan compared with 79% last year.
“Furthermore the introduction of a new 50% rate of income tax next year (2010 -11) and proposed limits on pension fund contributions may further accelerate the changes to executive reward packages as alternative types of more tax efficient long term incentive planning for senior executives are introduced.
“A significant factor which may impact the design of incentive plans in AIM companies is the extent to which executive directors hold a significant proportion of the equity, often due to the original owner managed status of the business. Over one quarter of the AIM positions hold more than 3% of the equity which is a much higher proportion than in FTSE SmallCap and FTSE 250 companies where less than 10% of positions have a significant shareholding.”
Further key highlights:- 37% of directors in AIM companies do not receive any pension benefits. This compares with around 10% of directors in larger companies;
- Boards are typically smaller in FTSE SmallCap and AIM companies. The typical number of board members in these companies is between six and eight. In FTSE 250 companies it is more likely to between seven and nine.
James concludes: “We expect the linkage between pay and performance to be scrutinised harder than ever in the coming year, and it is important that arrangements are fair and reasonable in the light of the current economic climate and particularly in the context of the wider employee population.”
† With AIM companies now required to recognise market value option awards as an expense under IFRS2 there is a recognised ‘level playing field’ in determining the structure and form of any share based incentive arrangement and therefore the choice of options or performance shares should be a decision based on the culture, share growth projections and availability of share capital amongst other factors.