Date post: | 29-May-2015 |
Category: |
Business |
Upload: | verumresearch |
View: | 179 times |
Download: | 0 times |
FTSE 100 Company Pay v Performance
Verum Research, January 2014
INFORMATION PACK
Presentation flow
1. Research and methodology
2. Performance analysis and the Verum Index
3-4. The Verum Index – pay v performance
5. Bonus pay growth exceeds performance, 2008/09-21012/13
6. Metric correlation and variation
4-5. Pay growth – average executive and non-executive pay
7. Companies with highest pay and highest pay increases, 2012/13
8. Companies with highest pay and highest pay increases, 2008/09-2012/13
9. What can Verum’s research provide
10. Verum’s research reports
11. About Verum
In 2013, Verum carried out extensive research into FTSE 100 companies’ director pay over the
period 2008/09 to 2012/13 in an attempt to determine whether there is a link or correlation
between a company’s financial performance and its executive and non-executive pay.
The research
Research objective – to determine whether a link exists between a company’s
financial performance and its director pay
The methodology
The performance of each FTSE 100 company is measured by some fundamental key metrics
which are common to all companies irrespective of industry or market in which they operate.
These key metrics concentrate on a company’s ability to generate returns on capital,
investment, equity and cash compared with director pay which are of essential interest to
investors.
The elements of executive and non-executive pay that are analysed in this research are:
• Basic salary (Salary figure from director emoluments)
• Incentives (Non-performance related benefits including pension)
• Bonuses (cash and share bonuses but excluding: LTIPs and deferred shares).
The metrics or ratios used in the analysis of FTSE 100 company performance include:
• Return On Capital Employed (ROCE)
• Return On Investment (ROI)
• Return On Equity (ROE)
• Cash Return On Invested Capital (CROIC)
• Cash to Profit Ratio (CTP)
• Normalised EPS (N.EPS)
• Profit After Tax (PAT)
• Assets to Debt (ATD)
• Equity to Debt Ratio (ETD)
Performance analysis (metrics)
The Verum IndexThe Verum Index is a league table of companies representing the difference in absolute growth
in director pay and company performance (based on the Verum composite of performance
metrics) over the period 2008/09 to 2012/13 rebased as an index with the company with the
largest difference in performance over pay representing 100.
The Verum Index shows that bonus pay growth has exceeded performance at 46% of FTSE 100
companies over the period 2008/09 to 2012/13
The Verum Index – Pay v Performance
Source: Verum Financial Research
0 10 20 30 40 50 60 70 80 90 100
Centrica
Burberry Group
Prudential
British Sky Broadcasting Group
Randgold Resources
GKN
Persimmon
ITV
BT Group
Severn Trent
Fresnillo
Aviva
Melrose Industries
Standard Life
Croda International
Verum Index - performance in excess of ave pay
The Verum Index measures the difference between the growth in company director pay and
the growth in company performance as measured by the Verum composite of performance
metrics over the period 2008/09-2012/13. The following charts are based on a comparison of
company performance compared with average executive director pay.
Companies towards the top of the index may have had large increases or decreases in director
pay but this was offset by an increase in company performance (significant decreases in pay
rather than an increase in performance will also result in a high Index position).
Companies where performance growth has exceeded pay
The Verum Index – Pay v Performance
Source: Verum Financial Research
Similarly, companies towards the bottom of the index experienced either a significant increase
in director pay compared with performance, or a significant decline in performance compared
with director pay over the period 2008/09 to 2012/13.
Companies where pay growth has exceeded performance
-50 -45 -40 -35 -30 -25 -20 -15 -10 -5 0
Johnson Matthey
Tullow Oil
Admiral Group
WPP
Carnival
CRH
Rexam
Glencore Xstrata
GlaxoSmithKline
Anglo American
Wolseley
Smith & Nephew
Easyjet
Lloyds Banking Group
Barclays
Verum Index - Performance below ave pay
Companies in the above chart may not have had substantial increases in director pay, but may
have experienced a decline in company performance, as measured by the Verum Index,
relative to director pay.
Pay growth – average exec pay
Source: Verum Financial Research
0.0
0.2
0.4
0.6
0.8
1.0
1.2
1.4
1.6
2008/09 2009/10 2010/11 2011/12 2012/13
£m
Basic salary Incentives Bonus
+11.4% +3.7%+3.2% -4.7%
£1
.27 £
1.4
2
£1
.47
£1
.52
£1
.45
% changeExecutive director average pay increased
overall by 13.6% between 2008/09 and
2012/13 from £1,271,878 (£1.27m) to
£1,445,101 (£1.45m). Basic salary increased
by 7.0%, Incentives (pension, health
insurance, company car) increased by 24.0%
and bonuses (cash and shares) increased by
17.1%.
Non-Executive director average pay
increased overall by 11.1% between
2008/09 and 2012/13 from
£123,759 (£0.12m) to £137,527
(£0.14m). Basic salary increased by
12.7% and accounted for 94.5% of
total pay in 2008/09 rising to 95.9%
in 2012/13.
Pay growth – average non-exec pay
Source: Verum Financial Research
If exec director total average pay (basic
salary + bonuses + incentives) for all FTSE
100 companies combined is compared
with the Verum performance composite, it
shows that total average pay falls below
performance overall for the period
2008/09-2012/13.
Bonus pay exceeds performance - All FTSE 100
Source: Verum Financial Research
But if exec average bonus pay is compared
with the Verum performance composite, it
shows that bonus pay exceeds company
performance overall for all FTSE 100
companies combined. Bonus pay
increased by 5% per annum between
2008/09-2012/13 while company
performance increased by only 2% per
annum.
100
128
136
131118
100102
116
135
103
90
100
110
120
130
140
2008/09 2009/10 2010/11 2011/12 2012/13
Exec Directors Ave Bonus Index
Composite Performance Index
100
112
116
119
114
100
102
116
135
103
90
100
110
120
130
140
2008/09 2009/10 2010/11 2011/12 2012/13
Exec Directors Pay Index Composite Performance Index
Profit After Tax and Return on Equity are
the ratios or metrics that are most closely
correlated with exec bonus pay. Cash-
based metrics are least correlated with
bonus pay.
The wrong ratios are being used to
benchmark director performance pay
against company performance!
Metric correlation and variation
Source: Verum Financial Research
Return on Investment (ROI) and Return on
Capital Employed (ROCE) have had a low
rate of variation over period 2008/09-
2012/13. Use of these ‘low variance’
metrics to benchmark pay results in low
variation in bonus pay and also pay
‘ratcheting’.
0
20
40
60
80
100
120
140
% V
ari
ati
on
Metric variation 2008/09-2012/13
-0.6
-0.4
-0.2
0
0.2
0.4
0.6
0.8
Co
rre
lati
on
Metric correlations with exec director bonus payments
FTSE 100 companies
with the highest
executive director
average pay in the
2012/13 fiscal year.
Highest pay and highest pay-increase companies
2012/13
Source: Verum Financial Research
0.0 0.5 1.0 1.5 2.0 2.5 3.0 3.5 4.0 4.5 5.0
Randgold Resources
Antofagasta
Royal Dutch Shell
HSBC Hldgs
AstraZeneca
Unilever
Barclays
Experian
WPP
Lloyds Banking Group
Companies with highest average executive director pay in 2012/13 financial year (£m)
0% 20% 40% 60% 80% 100% 120% 140% 160% 180% 200%
Capita
Reckitt Benckiser Group
Kingfisher
Weir Group
SSE
G4S
Unilever
Associated British Foods
Lloyds Banking Group
Admiral Group
Companies with highest increases in average executive director pay, 2012/13 financial year (%)
FTSE 100 companies
with the highest
increases in executive
director average pay in
the 2012/13 fiscal year.
FTSE 100 companies
with the highest 5-
year average
executive director
pay in the 2012/13
fiscal year.
Highest pay and highest pay-increase companies
2008/09-2012/13
Source: Verum Financial Research
FTSE 100 companies
with the highest
increases in executive
director average pay in
the 2012/13 fiscal year.
0 1 2 3 4 5 6
Randgold Resources
Experian
Antofagasta
AstraZeneca
Royal Dutch Shell
Smith & Nephew
Reckitt Benckiser Group
Unilever
HSBC Hldgs
Eurasian Natural Resources Corporation
Companies with highest 5yr average executive director pay, 2008/09-2012/13 (£m)
0% 5% 10% 15% 20% 25% 30%
Rexam
Lloyds Banking Group
Barclays
Legal & General Group
ITV
Intertek Group
Admiral Group
Imperial Tobacco Group
WPP
SSE
Companies with highest % average annual cumulative growth in executive director pay, 2008/09-2012/13
What can Verum’s research provide?
• Identify which companies have delivered real investor value in terms of pay versus
performance over the period 2008/09 to 2012/13
• Compare a company’s director pay and performance against other FTSE 100 companies
• Identify where individual companies rank in terms of total pay, average pay and bonus pay
against performance relative to other companies
• Identify which companies over-pay and under-pay their directors relative to performance
For investors or analysts?
For a FTSE 100 company?
• Justify director pay and reward policies in terms of actual performance to major investors
• Compare company director pay and performance against other FTSE 100 companies
• Use the Verum Index as a tool when considering the structure of future pay and reward
policies
• Use Verum’s research and the Verum Index to promote a company’s pay and performance in
the press and to investors.
The Verum advantage – independence!
Verum research reports
Available in two volumes:
1. Analysis of Director Pay by Component and by Company, 2008/09-2012/13
2. Individual FTSE 100 Company Pay and Performance Profiles, 2008/09-2012/13
Report sample pages:
About Verum
Verum Financial Research (Verum) is an entirely independent research company which
publishes research reports and information to the benefit of the wider investment market.
Employees of the organisation are members of the UK Market Research Society (MRS) and all
research is carried out in accordance with the MRS professional code of conduct. All research
is carried out in an ethical and professional manner and is conducted honestly and objectively
with the intent of providing independent information and analysis.
Verum Financial Research relies entirely on subscription or sale income from its published
research and is not sponsored or otherwise commissioned to produce and publish research
reports by any third party.
Verum Financial Research
145-157 St John Street
London
EC1V 4PW
Tel: 0843 289 5932
Fax: 0844 357 1834
W: www.verum-research.com