Diageo (LSE: DGE) (NYSE: DEO.US) missed targets on sales growth, pre-tax profits and cash flow after a slowdown in its sales in emerging markets such as China, Brazil and India. 2014 volume was down, operating profits down, net sales were down and EPS was down compared to results in 2013. But still, at last Thursday’s AGM, shareholders largely refused to join in a protest against executive remuneration at the company.
Shareholder advisory group PIRC had awarded a ‘red top’ rating to Diageo’s remuneration policies, joined in its protest by shareholder Royal London Asset Management. “Rewards made to the Executive Directors for the year are considered excessive in comparison with their base salaries,” PIRC said in a statement. But around 97% of voters backed the report of both last year’s pay and the company’s pay policy for future years.
At last year’s AGM Diageo fared worse, with 12% of shareholders voting against its pay policy, but the board consulted with shareholders and made changes, including simplifying long-term incentive policy and selecting more focused performance metrics for its annual bonus plan.
So performance was not as good as the company expected, but this had a significant effect on executive pay, with annual bonuses paying out at less than 10% of the maximum, only just over half of performance shares vested, and just over two-thirds of stock options became exercisable through missing targets. This is how executive pay is supposed to work: performance is poor, pay goes down, performance is good, pay goes up. It’s how it’s supposed to work… and it did. Â
Diageo chief executive Ivan Menezes earned less in the year to September 2014 than he did as chief operating officer (COO) in the prior year — £5 million compared to £8.3 million in 2013 — although he also received £2.7 million in share awards related to his COO role.
In fact, one of Diageo’s key competitors has a more generous pay policy. Anheuser-Busch InBev NV chief executive Carlos Brito could earn up to 360% of salary as cash bonus compared to 200% at Diageo, and received around 640% in stock options compared to a maximum 500% of salary for Diageo’s chief executive. Last year, Brito earned a base salary of €1.24 million, €2.48 million in cash bonus, plus matching shares, and received stock options worth around €8 million. Of course, AB InBev did much better than Diageo. Annual performance measured against EBITDA, cash flow, operating costs and market share showed year-on-year improvements. But again, this looks like executive remuneration working as it is supposed to do.
After all the investor angst this year, shareholders recognise that when a company performs poorly and the CEO gets a pay cut, at least management is sharing some of their pain. That’s why Diageo shareholders chose not to punish directors by voting against their pay packages. Had pay gone up, the result would have been very different.