- Exec director avg pay v Verum Index of performance, best: 1) Centrica 2) GKN 3) Severn Trent
- Exec director avg pay v Verum Index, worst: 100) Barclays 99) Lloyds 98) Smith & Nephew
- The Verum Index: a new and better way to evaluate director remuneration
- For more info, a whitepaper is available FREE at www.verum-research.com
As reported in The Financial Times (FT) this morning, a new report by independent research organisation Verum Financial Research highlights the correlation, or lack of it, between FTSE 100 companies’ recent financial performance and the remuneration of their executive and non-executive directors.
Using information from company reports and accounts for those in the FTSE 100 on 12 July 2013, the Verum FTSE 100 Company Pay report compares growth in company performance (incl.: ability to generate returns on capital; equity; debt in relation to assets; and earnings per share) with growth in director pay (incl.: basic salary; incentives such as pension, health insurance and company car schemes; and bonuses such as shares and cash bonus payments) over the fiscal period 2008/09 to 2012/13.
The report concludes that ‘performance exceeded pay’ at 65% of FTSE 100 companies, while ‘pay exceeded performance’ at the remaining 35%.
Table 1. Growth in executive director average pay versus Verum Index of company performance 2008/09 to 2012/13:
Company (top 15) |
Verum Index position* |
Company (bottom 15) |
Verum Index position* |
Centrica |
1 |
Royal Dutch Shell |
86 |
GKN |
2 |
AstraZeneca |
87 |
Severn Trent |
3 |
Standard Chartered |
88 |
Persimmon |
4 |
CRH |
89 |
Prudential |
5 |
Old Mutual |
90 |
Burberry Group |
6 |
Anglo American |
91 |
Hargreaves Lansdown |
7 |
GlaxoSmithKline |
92 |
Melrose Industries |
8 |
Wolseley |
93 |
ITV |
9 |
SABMiller |
94 |
British Sky Broadcasting Group |
10 |
WPP |
95 |
Croda International |
11 |
Glencore Xstrata |
96 |
Fresnillo |
12 |
Easyjet |
97 |
Land Securities Group |
13 |
Smith & Nephew |
98 |
BT Group |
14 |
Lloyds Banking Group |
99 |
Aviva |
15 |
Barclays |
100 |
Source: Verum Financial Research
In other key findings, the report highlighted a decrease in the number of executive directors, an increase in the number of non-executive directors, and the extent to which director pay has outstripped average pay:
- Number of FTSE 100 exec directors down 5.8% (349 to 329) in 2008/09 - 2012/13
- Number of FTSE 100 non-exec directors up 6.1% (725 to 769) in 2008/09 - 2012/13
- Average pay of a FTSE 100 exec director up 13.6% in 2008/09 - 2012/13
- Average pay of a FTSE 100 non-exec director up 11.1% in 2008/09 - 2012/13
- Average pay of all UK employees up 2% in 2008/09 - 2012/13 (a 10% real terms fall)
Bonus culture is alive and kicking
The Verum research found that, while the basic salary component of an average FTSE 100 executive director’s pay increased by 7% between 2008/09 and 2012/13 (from £0.60m to £0.64m), incentives increased by 24% (from £0.2m to £0.24m) and bonuses by 18% (from £0.47m to £0.56m) over the same period. In particular, in 2009/10, while the overall performance of all FTSE 100 companies rose by 2% according to the Verum Index, the bonus element of executive director pay increased by 28%.
The average pay of a FTSE 100 executive director in 2012/13 was £1.45m. For a non-executive director it was £137,527. However, it should be noted than many directors hold roles at more than one company, so their income will often be much higher.
Verum Financial Research spokesman, Robert Macnab, commented: “The gulf between average income and executive pay was initially highlighted by the scandal surrounding Fred Goodwin’s retirement package from the Royal Bank of Scotland in 2009. From an investor perspective, there is real concern that bonuses and incentives have become detached from performance, that they have become almost part of fixed pay.
“Our research suggests that the metrics commonly used by FTSE 100 companies to benchmark director remuneration – Total Shareholder Return (TSR**) and Earnings Per Share (EPS) – have serious shortcomings. TSR can be influenced by generous dividend policies and EPS can be enhanced by higher borrowings. This goes some way to explaining the ‘ratcheting effect’ in director pay.
“The Verum Index is based on a broader set of fundamental performance metrics, including: Return On Capital Employed (ROCE), Return On Investment (ROI), Return On Equity (ROE), Cash Return On Invested Capital (CROIC), Cash To Profit Ratio (CTP), Earnings Per Share (EPS), Profit After Tax (PAT), Assets To Debt (ATD) and Equity To Debt Ratio (ETD). It is a better way to evaluate director remuneration and a valuable new tool for both investors and pay structure decision makers.
“Interestingly, if total executive director pay for all FTSE 100 companies had been benchmarked against the Verum Index, it would have been around 20% higher than the actual figure of £482m in 2011/12. You could argue that the directors at the best performing companies are substantially underpaid. Equally, shareholders in those companies towards the bottom of the Verum Index may well have questions for their senior management teams.”