Out of Control? How companies work in practice Why is executive pay - - PowerPoint PPT Presentation

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?

Angus Thirlwell Alison Brittain £288,560 £ ???

PAY

Expectation External: competitor pay Internal: comparatives

Influences on pay

Senior Executives Entry Grade Company performance as well as personal performance Bonus an increasing proportion

• f pay

External pay more of an influence than internal comparisons

Next level up proposes; level above that approves…. …but what happens at the top?

Senior Executives Entry Grade Remuneration Committee

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

• tal Pay or “The Single Figure of

T

• tal Remuneration”

The Pay Package – maximum 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”

Keith Cochrane pay: 78% less in 2015 than in 2011

0.5 1 1.5 2 2.5 3 3.5 4 4.5 5 2011 2012 2013 2014 2015

RISK!

• For the company –

events beyond their

• control. Risks set
• ut 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: Paying in shares aligns pay with shareholders- executives and investors share in the gain and also share in the pain Share values are influenced by how senior executives are perceived. What critics say: Paying in shares means that the future value of pay can’t be predicted – pay is uncertain. Paying in shares can reward executives just because the stockmarket goes up – and that’s beyond 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?

Institutional Investors (Shareholders) BOARD of Directors Head of HR/Reward REMUNERATION COMMITTEE Non-executive, independent directors Remuneration Consultants

Why fund managers obsess about investment returns

What actually happens:

Institutional Investors (Shareholders) BOARD of Directors Head of HR/Reward REMUNERATION COMMITTEE Non-executive, independent directors Remuneration Consultants

The real solution: make more time?

Consultants recommend

RemCos agonise Committee members consult Boards consider Fund managers confer Proxy Advisers demur

Pay in perspective

Top 10% (income > £54,000) pay 59% of UK income tax Top 1% (income > £164,000) pay 27% of UK income tax

2016: £0 in fact minus £890,000,000 £288,000 £853,000 £500,000 £1.3m + ?

High Pay – not just in plc

£2,509,000

Govt: £1.5m Net: £1.3m

£2,613,594+ £3,500,000

annual rate

£15,000,000

What matters? Pay or wealth?

£475m $40m £275m; 2015: £70m; 2016: £48m £7,800,000,000 Dieter Schwarz dynasty c$22,000m Albrecht dynasty c$15,000m

Out of control?

• r
• 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?