It’s a lot of money by anyone’s standards, but were they all worth it?

WPP

WPP’s Sorrell is no stranger to “highest paid” lists, nor to pay controversy since shareholders that were unhappy about his remuneration voted against it in 2013. That led the company to change its pay policy and move away from what I, for one, thought one of the best structured (albeit generous) long-term bonus plans: the LEAP or Leadership Equity Acquisition Plan. What I liked about the plan was that it required executives to put their money where their mouth was and actually buy shares with their own cash. The company then matched these depending on WPP’s performance against its peers. Since this was usually pretty good, Sorrell got paid a lot of matching shares.His appearance at the top of the list is a legacy of LEAP with one of its three final payouts.

In the performance period being measured, WPP’s total shareholder return (TSR) increased by 241 per cent over five years. In fact, the company reported two awards in 2013, boosting his total pay to £29,846,000. However, neither of these actually vested during the 2013 fiscal year. Incomes Data Services (IDS), which counts only the money that actually ends up in the CEO’s bank account in the relevant year, has his pay in the survey as £18,543,578. That means there’s £22.7 million to count in next year’s pay, though…

Shell

In a similar situation, Shell’s former CEO received almost £11 million in long-term incentive gains, the vast majority of Voser’s £13,983,328 total pay. Long-term incentives are based on TSR, EPS, hydrocarbon production growth and net cash from operating activities.

At the end of the performance period for the share award used by IDS, which was from the beginning of 2010 to the end of 2012, Shell ranked second in its peer group for TSR. Its EPS growth ranked it first, second for hydrocarbon production growth and first for growth in net cash from operating activities. While Shell’s performance has since faltered, these results make it clear why it is at number two in the list.

Crest Nicholson

Again, Stephen Stone’s £13,615,934 in total pay was largely made up of £12.3 million in performance shares, but from a far less common type of plan. Equity interests were awarded to the CEO and other senior managers in 2009 to encourage them to grow value in the firm. These were due to vest on an “exit”, which included an IPO — Crest’s IPO in February 2013 triggered the payouts, which were based on how quickly significant value was created for shareholders and, according to the annual report, “the quantum of this, using real investment thresholds for the base line.” Since the value growth hurdles were met, stock options and performance shares vested, leading to this substantial payout.The scheme has been terminated, and more conventional share options were awarded subsequently.

While shares rose rapidly from the IPO price of 253p to a high of more than 420p in April 2014, they have since fallen back to around 334p today, indicating that while value was created for the original owners, public shareholders have not benefited as much.

Experian

At Experian, CEO Don Robert earned total pay of £12,972,842, boosted by £10.8 million in performance shares. These are based on a combination of profit before tax, operating cash flow and TSR against the FTSE 100, with a return on capital employed rider.

As the company points out in its remuneration report, during the three-year performance measurement period for the awards that vested during the last fiscal year, Experian’s stock price grew by 89 per cent. “As a result, US$8.3m [£5 million, almost half] of the … figure for Don Robert … was due to share price appreciation over the period from the date of grant.”

Robert is due another smaller, but substantial award during the 2015 fiscal year, though the company’s stock price rise during that period was lower, at 38%.

Vodafone

As with Crest Nicholson, while Vodafone’s CEO did profit from the exercise of stock options, these did not make up a significant portion of total pay, which was £12,711,503. The largest part of pay came, yet again, from performance shares. Vodafone compares its performance against the TSR of a group of telecom companies including BT Group, Telecom Italia, Deutsche Telekom, Telefónica, Orange and, unusually, an emerging market composite group that consists of the average TSR performance of Bharti, MTN and Turkcell. Given that the company is competing with these local telecom providers in these markets – and more – it is an important group to measure success against.

Although revenues and profits grew in these areas, final results were adversely affected by currency fluctuations. TSR performance, on the other hand, exceeded that of the peer group significantly, outperforming the median by 18.3 per cent a year. The performance shares are also dependent on adjusted free cash flow over three years. For the period in question the company achieved £20.8 billion, which compares with a target of £20.5 billion and a maximum of £23.0 billion.

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Pay figures are taken from Incomes Data Services’ Directors' Pay Report 2014/2015, published earlier this month, performance data was supplemented from company annual reports.

Modest pay has not prevented Helge Lund from delivering stellar performance at Statoil, however. When he joined in 2004, Statoil’s stock price was NOK87.50. It is now NOK153, despite being in free fall since June this year when it was at a high of NOK195.

Solid growth aside, of late, Statoil’s stock price has performed much like BG’s, volatile. 

BG Group plc’s stock price has been all over the place this year, with a high of 1,352.50p on 16 January, followed by a precipitous drop to, in the same month, to 1,008p, and up again to its current trading price of around 1,054p. After falling initially on the announcement of the new CEO’s appointment, BG’s share price rose in Friday’s trading, only to fall again when the markets opened this week.

Maybe being used to volatility is one of the reasons Lund was hired.

Pay policy at the two companies is as different as pay levels

Lund’s first year at BG – he is assuming the position on 2 March next year – will net him almost  £29m. That includes a golden hello, special hiring incentives and buyouts of money left on the table at his former employer, but it is also 22 times his earnings at Statoil.

It is not just pay levels at the two companies that are divergent. Statoil’s pay policy is very straightforward, comprising largely a base salary with a bonus potential at 50 per cent of salary based on government guidelines. Long-term incentive policy is even simpler. The company gives executives around a quarter of their base salary in an additional cash award and they are obliged to buy Statoil shares with it and hold them for a minimum of three years. That very simply and elegantly ties pay to share price performance.

But what about at BG? Apart from the large cushion of a £1.5m base salary, Lund could earn up to £3m in a cash performance bonus based on EPS and ROACE, and a potential £9m in performance shares based on TSR against a large group of national and international oil and gas comparators. This is on top of a buyout of his unvested Statoil shares of £3m and another £12m in shares based on “personal performance criteria” which will have to be sanctioned at a special meeting of shareholders as it exceeds the maximum allowed under the plan — an authorisation that is by no means certain given the current level of shareholder unrest of high CEO pay.

You can’t accuse the man of being underincentivised.

Of course, of late, BG’s share awards have not been paying out at full value, either to former CEO Sir Frank Chapman or to current CEO, Chris Finlayson, because BG has been underperforming its peers, so Lund is not guaranteed all of this money. This uncertainty may have something to do with the turmoil at the top of BG which lost a CEO in 2012, then a CFO, then a COO. The pipeline of executive talent appears to have run dry since Finlayson, after only just over a year in the job, is being replaced by Lund, an outsider, and the new CFO was recruited from AstraZeneca.

If Lund does stabilize the stock price and start its recovery, he will still have to outperform BG’s peers — which include Statoil — in order to get paid, though, of course, annual bonuses can be earned in the interim, and there’s always those personal criteria to be met. But wouldn’t it have been simpler — as well as less costly for shareholders — to copy Statoil’s policy and just give him some cash and tell him to buy BG shares with it? That would make sure he cared.

Performance shares are free, once you’ve delivered the performance. Actually having to purchase shares for hard cash is a very different experience, but it does turn executives into shareholders. That’s, after all, what ordinary shareholders have to do. 

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Diageo

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.  

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.

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Paul does not own shares in Diageo.

It started with Barclays, whose CEO later admitted that “a lot more needs to be done” to rein in bankers’ bonuses. The bank withstood four hours of criticism of its bonuses at its AGM, culminating in a rare institutional shareholder rebuke when a representative of Standard Life stood up to announce that it was voting against the remuneration report because “(w)e are unconvinced that the amount of the 2013 bonus pool was in the best interests of shareholders”. Barclays’ pay plans were eventually approved with a small margin.

Shareholder rebellions over directors’ pay continued at Pearson, AstraZeneca, National Express, Standard Chartered, Reckitt Benckiser and online grocer Ocado. Nearly one-third of Reckitt’s shareholders opposed its annual pay report. A fifth rejected the separate pay policy vote; a new, second opportunity to vote on pay policy for the next three years. A fifth of Ocado shareholders also voted against the online grocer’s pay report, objecting to a matching share plan that was due to award chief executive Tim Steiner shares worth more than £12m.

Opposition was often due to criticism by the shareholder body the Association of British Insurers, but most often shareholder advisor PIRC was behind the protests. PIRC encouraged protest against M&S, Sainsbury’s and Sports Direct bonuses and pay plans, as well as at oil firm Afren, G4S, WPP and HSBC. Investec’s pay plan was also opposed, by 44% of shareholders, amid criticism that awards were “excessive”. In the end, most of these plans passed. For example, HSBC had only around 20% of investors voting against the directors’ pay report. But it is widely recognised that even if you have a fifth of shareholders disapproving of pay, you had better start talking to them about it. FirstGroup’s pay approval actually went up this year, from 71% to 80%, but the chief executive still promised a “deep review” of pay.

On the other hand, Kentz was the first company to have its pay plan rejected under the revised rules this year. Luckily, the company has since been acquired by SNC-Lavalin, so it doesn’t have to worry about it anymore. Then in August, another company, Burberry, saw 52% vote against its pay report.

As I said here, the key to most of these votes is performance. Shareholders don’t like high pay and low performance. On the other hand, they will accept low pay and low performance, as at Marks & Spencer, where CEO Marc Bolland declined a pay increase for a fourth year running after the company missed sales and profitability targets. No shareholder revolt there.

So, did Vince Cable sanction these revolts? He certainly was responsible for putting the mechanisms in place for protest to happen. But by lining companies up for a warning at the beginning of the AGM season, he gave shareholders a mandate to object if they felt that companies were not heeding prior warnings.

As High Pay Centre director Deborah Hargreaves has said, the new regulations are not enough to bring top pay down. The Centre’s figures show that pay for a FTSE 100 CEO has gone from being 60 times the average UK worker to 160 times over the last 15 years. Where this level of increase is justified, shareholders are quiet; where it is not, they will protest.

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The Motley Fool has recommended shares in Burberry.

Two companies facing pay critics had different responses from shareholders at annual general meetings (AGMs) on Wednesday: the key to the difference? Performance.

SABMiller’s (LSE: SAB) had a difficult two years. Its chairman died while in post and the share price fell from a high of 3,599p in May last year to around 2,739p in February this year. It has recovered somewhat, trading at around 3,350p today. That volatility might have been enough to set shareholders on edge and lead them to vote in numbers against the company’s pay practices… but it wasn’t pay levels.

Last year, SABMiller received the support of 95% of its shareholders for its remuneration report. And this year, despite being promoted to the chief executive position during the 2014 fiscal year, Alan Clark’s total remuneration actually fell by 3.5%, and he earned roughly half what his predecessor, Graham Mackay, did in 2013.

So, not pay levels then, but pay policy. Shareholder advisory group Pirc (Pensions & Investment Research Consultants) was the prime critic of pay at SABMiller in the weeks running up to the AGM. It stated that maximum incentives were excessive (they are 925% of base salary for Clark). Also, the experience of employees, whose bonuses went down 3%, was significantly different from Clark’s, whose bonus went up 126% (though the promotion played a part).

Pirc also criticised the lack of non-financial measures of long-term performance. SABMiller uses EPS and total stockholder return for its shares and share option awards, only applying so-called sustainability measures: water usage, fossil fuel emissions, health & safety to the annual bonus. In fact, the remuneration report says: “a significant proportion of the annual bonus opportunity [is] based on longer term and sustainability metrics.” One wonders, then why the long-term bonus isn’t based on those as well.

Votes from Wednesday’s AGM show that the company’s pay policy failed to receive the support of 21% of shareholders, though most of these abstained rather than actually voted against management. In this case, falling revenues and free cash flow failed to protect management from shareholder discontent.

TalkTalk Telecom Group’s (LSE: TALK) stock price fell too during 2013, from 272p in March to 217p in May, but, despite a fallback in May this year, it now stands at 320p, so shareholders can’t be complaining about that. Except that few, if any of their peers — such as BT, ITV and AdEPT — experienced that fall last year and have therefore outperformed the group.

Again Pirc is one of the main critics of pay at the company, this time calling it excessive. Chief executive Dido Harding received 12.6x base salary as incentives in fiscal 2014, bringing total pay to over £6.8 million. Comparisons with the rest of the executive team – none of whom were there for the whole fiscal year – are not relevant. Many of the major performance targets were missed during the year – EBITDA, free cash flow – though sustainability targets were met. Nevertheless, a bonus of £320,000 might seem excessive for a company whose EBITDA fell by 37%. On the other hand, revenues – another metric used for the annual bonus – have been growing for the last six quarters. This news, and possibly news of an expanded deal with Sky, allowing customers to watch Sky Sports, that was announced on Wednesday’s AGM, seemed to be enough to limit shareholder dissatisfaction with pay. Only 7.5% of shareholders voted against or withheld votes from the company’s remuneration policy, and fewer still failed to approve the remuneration report.

For TalkTalk, performance was enough to stave off a major protest vote about high pay.

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Paul Hodgson has no position in any shares mentioned. The Motley Fool has no position in any of the shares mentioned.