After BP (LSE: BP) ran its largest ever annual loss last year, a staggering $6bn, and began targeting thousands of job cuts, the board of directors duly went about cutting CEO Bob Dudley’s pay. Well, maybe in Dreamland. Here in reality, Dudley received a nearly 20% raise to bring his total 2015 compensation to $19.6m. True, Dudley did meet the operational and safety targets laid out to receive his increased bonus, but the optics of a pay rise after share prices slid 15% in a year are poor to say the least.
Unsurprisingly, 59% of shareholders were against confirming Dudley’s pay package at the recent AGM in a non-binding vote. Of course, a CEO can do little to halt collapsing crude prices or the billions paid in fines related to the Gulf of Mexico spill. But shareholders can’t be blamed for expecting the CEO to make less when 5,400 jobs were lost last year, debt increased substantially and the company was forced to make dramatic cuts to capital spending, which will likely constrain long-term returns.
Shareholder returns
Reckitt Benckiser (LSE: RB) CEO Rakesh Kapoor’s £23.9m pay package is only slightly less galling considering the consumer goods giant’s shares posted a 20% gain in 2015. This performance easily trounced a flat FTSE100 and gained twice as much as competitor Unilever. Reckitt’s remuneration policies are also a fair sight better since they’re more directly linked to shareholder returns, including earnings per share growth over a three-year period and net income targets.
The company’s long-term incentive plan has improved in recent years by adding clawback clauses, as now are standard practice at many banks, but could go further by stretching the time frame for EPS growth or shareholder returns. The larger question over whether individual CEOs actually effect that much change on their companies remains a thorny one, particularly in the case of RB, which performed well for years before Kapoor took the helm. However, as long as the company continues to outpace the market while simultaneously investing for long-term growth, RB shareholders have less reason to gripe than BP’s.
Big money
Both Kapoor’s and Dudley’s pay pales in comparison to that of WPP (LSE: WPP) chief Martin Sorrell’s £70.4m 2015 take home. And while shares of the media relations firm performed well last year, they certainly didn’t increase 65%, as Sorrell’s pay did. However, this may be less of a hot button issue for WPP going forward as this year’s high total compensation was due to a share vesting programme that was discontinued several years ago following a previous shareholder uprising.
Additionally, WPP is a slightly different story than BP or Reckitt Benckiser as Sorrell founded the company. Still, CEO bonuses and benefits grew much faster last year than the average employee’s, which could conceivably lead to morale problems among the workers who did, well, most of the work. And although it’s impossible to determine how much any individual CEO added to a company’s bottom line, it’s hard to believe that either Sorrell wouldn’t work as hard for less money, or that a suitable replacement couldn’t be found.