Out of Control? How companies work in practice Why is executive pay so high and who guards the guards?
Behind every shopfront there’s a story Why the stockmarket matters: When things go wrong, companies: Raise funds from shareholders Sell bonds to the market Borrow from banks Call in the administrators
Behind every shopfront there’s a story When things go right: Start up Scale up Float or sell How much is it worth to the company to have high calibre chief executives rather than mediocre chief executives?
If High Pay is too high, how high should it be? £ ??? £288,560 Angus Thirlwell Alison Brittain
Expectation PAY External: Internal: competitor pay comparatives
Influences on pay Senior Executives Company Bonus an External pay performance increasing more of an as well as proportion influence than personal of pay internal performance comparisons Entry Grade
Next level up proposes; level above that approves…. …but what happens at the top? Remuneration Committee Senior Executives Entry Grade
The classical company structure Shareholders BOARD Non-executive, independent directors (part time, not employees) + Executive directors (full time employees) Senior Executives Employees etc
Keeping pay simple? FIXED PAY (guaranteed) Salary – paid for doing the job, not how you perform. Benefits – also fixed: e.g. pensions, employees share plans, private medical insurance, company cars. VARIABLE PAY (PAY AT RISK – can be zero) Bonus (cash) – looking back at last year’s performance. A bonus is for doing a good job, not just for doing something exceptional. Share awards – future performance – the award is now, but executives have to wait several years before they receive anything.
Which is more ethical: to pay for performance or not to pay for performance?
How to keep pay simple Don’t pay for past performance : performance- related pay depends on assessing performance. Can it ever be objective? Don’t pay for future performance: that requires saying how future performance will be judged – events get in the way and nobody knows what that performance will be – or what the eventual award will be Don’t pay in shares: nobody knows what the share price will be so nobody knows what the pay will be Don’t defer pay : that produces a time shift – and two ways of looking at pay: what was actually received and what might be paid in the future
When we say pay, what do we mean? Last year (£) – pay received This year (£) – pay to be earned T otal Pay or “The Single Figure of The Pay Package – maximum T otal Remuneration” pay, depending on performance
What does Alison Brittain have to do to earn £4m? Whitbread Strategy: (long-term sustainable, ethical growth): To grow to 85,000 Premier Inn rooms in the UK by 2020; Expand Premier Inn into Germany and Costa into China; Back this up through efficiency, developing technology, sound organisation and property management. But what does she have to do to achieve this?
What does Alison Brittain have to do to earn £4m? Or rather, to receive pay worth £4m at the time of the award? Her performance will be assessed and measured by: no lapses in health and safety; retaining staff; keeping customers satisfied; growing the number of Premier Inn rooms and Costa outlets; expanding sales, enhancing the brand and several key financial measures How well she does against these measures drives her variable pay
HIGH PAY KEEPS GOING UP? “10% pay rise? That’ll do nicely” Potentially ignores pay cuts over the last three years “Weir not all in this together” 5 4.5 4 3.5 3 2.5 2 1.5 1 0.5 0 2011 2012 2013 2014 2015 Keith Cochrane pay: 78% less in 2015 than in 2011
RISK! • For the company – events beyond their control. Risks set out in their annual report. • For the shareholder: potential loss on their investment • For the individual: pay-at- risk…
Carolyn McCall: Easyjet’s share price distorts her total pay Date of award: 2012: share price: £7.37 Three years later: share price: £16.99 Share award in 2015 worth £4.6m: Total Pay £6.2m Date of award: 2013: share price: £14.99 Three years later: share price: £10.78 Share award in 2016 worth £0.5m: Total Pay £1.5m Time-shift: what share value should be treated as pay?
Why pay in shares? What investors say: What critics say: Paying in shares Paying in shares aligns pay with means that the future value of pay can’t be shareholders- predicted – pay is executives and investors share in the uncertain. gain and also share in the pain Paying in shares can reward executives Share values are just because the influenced by how stockmarket goes up – and that’s beyond senior executives are perceived. their control.
Whose company is it anyway? | What’s supposed to happen: Shareholders BOARD Non-executive, independent directors (part time, not employees) + Executive directors (full time employees) Senior Executives Employees etc
Tightening controls on companies
Sunlight the best disinfectant? 1998: the pay of executive directors has to be disclosed. Impact: fewer executive directors; power shifted away from the Board to the executive committee The Single Figure of Total Remuneration (2013) is what was actually received last year, not what might be paid this year - standard format for every listed company. Impact: media coverage improved Intention was for transparency to curb pay excesses through naming and shaming. Impact: pushed up pay instead.
Strengthened shareholder powers over pay (2013) Past pay subject to an advisory vote – advice can either be followed or rejected. Impact: companies treat advisory votes as advisory votes and are then accused of ignoring shareholders Future pay subject to a binding vote (every three years). Impact: pay policy changes blocked.
What actually happens? BOARD of Directors Institutional Investors (Shareholders) REMUNERATION COMMITTEE Non-executive, independent directors Remuneration Consultants Head of HR/Reward
Why fund managers obsess about investment returns
What actually happens: BOARD of Directors Institutional Investors (Shareholders) REMUNERATION COMMITTEE Non-executive, independent directors Remuneration Consultants Head of HR/Reward
The real solution: make more time? Consultants recommend Proxy RemCos Advisers agonise demur Fund Committee managers members confer consult Boards consider
Pay in perspective 2016: £0 in fact minus £890,000,000 Top 10% (income > £54,000) pay 59% of UK income tax Top 1% (income > £164,000) pay 27% of UK income tax £288,000 £500,000 £853,000 £1.3m + ?
High Pay – not just in plc £3,500,000 £2,509,000 annual rate Govt: £1.5m Net: £1.3m £15,000,000 £2,613,594+
What matters? Pay or wealth? £475m $40m £275m; 2015: £70m; 2016: £48m Albrecht dynasty c$15,000m Dieter Schwarz dynasty c$22,000m £7,800,000,000
Out of control? or • Pay inequality is a continuing concern • Controls make executive pay seem complicated • Misinterpretations have led to claims that pay, and therefore, quoted companies are out of control • Increased regulations and disclosure increase bureaucracy. This reduces productivity and places UK quoted companies at a disadvantage to unquoted competitors, like private companies and subsidiaries of foreign companies.
Out of Control? How companies work in practice Why is executive pay so high and who guards the guards?
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