Top executives are using sleight of hand to disguise recent increases in corporate pay and avoid being portrayed as “fat cats”, finds Ian Fraser
THE TOPSY-like growth in executive pay among directors of Scottish-based plcs and larger private companies appears to have slowed down considerably in 2003. According to figures compiled by the Sunday Herald, extrapolated from published reports and accounts of more than 50 Scottish-based firms, the average pay of the top 50 highest earning executives in Scotland grew by just 3.14% in 2003.
This compares with figures from a Sunday Herald survey conducted in December 2002, which revealed that top executives’ were ‘s pay was then growing at the much faster rate of 20% to 30%.
This suggests that plc remuneration committees, whose role is to police corporate pay, have reined things in dramatically.
Pressure from corporate governance watchdogs and institutional investors, to whom the government has delegated the task of keeping corporate excesses in check, and who scored a famous victory when they forced GlaxoSmithKline to scrap a proposed £12 million golden parachute for chief executive officer Jean-Pierre Garnier, also probably played a part.
Certainly, few companies today want to risk feeling the wrath of institutional investors, politicians and the media by over-rewarding their executives, especially when share prices are in the doldrums.
The obsession with executive pay is, according to veteran City observer Anthony Hilton, pushing many talented executive to eschew the glare of the corporate governance spotlight in favour of areas where they are not obliged to declare their pay — such as investment banking and private equity.
But it also appears to be driving a process of subterfuge, with many remuneration committees skewing executive pay towards items that do not appear in the main “directors’ remuneration” section of the annual report and accounts (this deals only with basic salary, annual bonus and benefits).
A plethora of additional benefits — including share options, medium and long-term incentive plans, phantom share schemes and, of course, pensions — are increasingly playing a part.
According to consultancy Independent Remuneration Solutions (IRS), these additional benefits typically account for more than half the total pay of directors at larger plcs.
Having scrutinised the latest annual reports of nine of the 10 largest companies in the UK, IRS found that the basic pay of CEOs at the largest firms rose by only 3% in 2003. By contrast, however, total pay had soared by an average of 24% last year. The consultancy said the widespread trend towards performance-related pay had not been matched, however, by a corresponding cut in basic pay.
IRS found basic salaries made up on average just 16% of plc chief executives’ total pay in 2003. The consultancy found that the average payout for each CEO was £5.4m. Vodafone’s Sir Christopher Gent, who retired last year, led the field with a total package worth £10.9m while Eric Daniels, chief executive of Lloyds TSB, picked up the smallest pay deal of £2m.
IRS made its calculations by adding clearly listed items such as basic pay, benefits and annual bonus to “hidden figures” such as the value of a boss’s pension pot, their shares and share options. The Sunday Herald list does not take account of additional benefits because each company calculates these differently and because they are accounted for in different ways and spread over numerous pages of their reports. But it does suggest that the average 3.14% increase is misleading.
IRS director Cliff Weight, said: “CEOs are getting bread, butter, jam and cream.” He adds: “Some [annual reports] do not include the expected value of long-term incentives and none state the total remuneration.”
Royal Bank of Scotland directors dominate the upper echelons of the Sunday Herald earnings chart, even though they all took home less in basic salaries, annual bonuses and benefits in 2003 than they did in 2002. This was partly because annual bonuses worth more than 200% of salary were paid out to many RBS directors during the year ended December 2002, the year the integration of NatWest was completed.
In 2003, the RBS directors’ short-term performance bonuses were more modest, although they still typically stood at more than 100% of salary. In the case of Larry Fish — head of RBS’s US businesses, whose Citizens Financial was last week much enlarged through the £5.8bn acquisition of Cleveland, Ohio-based Charter One and who sank to number two in the rankings this year — they still approached 200% of basic salary.
This is where the subterfuge starts. For, in reality, the rewards of being an RBS director stretch far beyond basic salary and annual bonuses, and especially if your name is Larry Fish. The bank’s board of directors enjoy a wide range of additional benefits, itemised in an 11-page section within its 228-page report and accounts. But the true picture is hard to ascertain even for accountants.
Others who significantly jumped up the rankings during 2003 included three directors of ScottishPower — Sir Ian Russell (up 74% to £995,000 and eighth in the chart), David Nish (up 84% to £643,700 and 22nd place) and Charles Berry (up 84% to £550,800 and 31st place). Other climbers included Wood Group’s Wendell Brooks (up 104% to £478,000, and 36th place), Stagecoach’s Brian Souter (up 72% to £800,000 and 10th spot) and Bob Ivell, head of retail at Scottish & Newcastle (up 46% to £639,412, and 23rd place).
A clutch of Isis Asset Management directors including chief executive Howard Carter (up 58% to £732,000; 16th), Robert Talbut (up 168% to £483,000; 35th) and Edinburgh-based Peter Arthur (up 49% to £416,000; 42nd) also received generous pay hikes.
But Isis’s head of communications and strategy Jason Hollands says that two of these joined from Royal & SunAlliance Investments, a takeover completed by Isis in July 2002, which meant that their 2002 pay figures related to only half a year’s remuneration.
Hollands also highlighted the fact that deferred bonuses for all Isis directors, declared in 2002, were paid out last year. He says: “Isis is now a top-10 asset management business, which carried off one of the biggest and most successful industry integrations in many years.”
At Wood Group, Wendell Brooks also got a $497,000 (£280,000) bonus despite lacklustre stock market performance. The report and accounts says the incentive bonus was “based upon the well-support division’s level of performance over a three-year period compared to a target.” The only woman in the top 70 earners was Susan Rice of Lloyds TSB/Scottish Widows who earned (£276,000, up 25% and ranked 63rd.
Another area where executives can boost their personal wealth — while avoiding “fat cat” headlines — is through the use of pensions. At Standard Life, directors Iain Lumsden (ousted as chief executive in January), Sandy Crombie, Claude Garcia and John Hylands benefited from a £2.6m combined payment into their pension pots last year. This was way ahead of their combined remuneration of £2.45m.
Something similar is going on at HBOS, where the top brass are making up for flat total pay with massive injections into their pension pots.
The bank’s five highest-paid bosses saw their pension transfer values soar by more than £5.2m in the year, while their total pay was just £3.95m. James Crosby saw his pension pot increase in value by £1.89m to £5.77m. RBS’s Fish received a £1.952m pension increase, the largest of all the executives surveyed, giving him a £5.8m pot.
The biggest overall pensions pot, however, is held by S&N chairman and former chief executive Sir Brian Stewart. Stewart — also chairman of Standard Life — has an S&N fund worth £7.6m.
This article was published in the Sunday Herald on 9 May 2004