Executive bonuses

The huge bonuses paid to many executives in the private sector have been the focus of public attention. In particular, excessive bonuses paid in the banking sector were seen as a contributing factor to the crisis in the sector at the end of the last decade, incentivising risky practices focused on short-term gain but with negative longer-term impact.

Despite opposition from the UK government, the EU adopted the Capital Requirements Directive (CRD4) in 2013, requiring that bonuses in the finance sector be limited to 100% of base pay, or 200% with the approval of at least 66% of shareholders. This took effect in January 2014.

Nevertheless, executive bonuses continue to soar across the private sector. A report from the High Pay Centre in October 2014 showed that by 2010 total earnings for FTSE 350 directors had surpassed their 2007 pre-recession peaks. Long-term incentive plans (LTIPs) have increasingly made up the lion’s share of these packages. LTIPs involve beneficiaries being granted a block of free shares at the beginning of a performance cycle. The full value of the shares is payable at the end of the cycle, typically a three-year period and dependent on performance criteria being met.