LRD guides and handbook February 2015

Pay: getting it right - bargaining information for union reps

Chapter 1

Executive bonuses

[ch 1: pages 11-12]

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.

See High Pay Centre, Executive remuneration in the FTSE 350 — a focus on performance-related pay, 2014: http://highpaycentre.org/files/IDS_report_for_HPC_2014_final_211014.pdf.