New Verum Financial Research Index Benchmarks FTSE 100 Company Performance Against Executive Directors' Pay

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Jan 24, 2014, 07:00 ET

LONDON, January 24, 2014 /PRNewswire/ --

Exec director avg pay v Verum Index of performance, best: 1) Centrica 2) GKN 3) Severn Trent
Exec director avg pay v Verum Index, worst: 100) Barclays 99) Lloyds 98) Smith & Nephew
The Verum Index: a new and better way to evaluate director remuneration
For more info, a whitepaper is available FREE at http://www.verum-research.com

As reported in The Financial Times (FT) this morning, a new report by independent research organisation Verum Financial Research highlights the correlation, or lack of it, between FTSE 100 companies' recent financial performance and the remuneration of their executive and non-executive directors.

Using information from company reports and accounts for those in the FTSE 100 on 12 July 2013, the Verum FTSE 100 Company Pay report compares growth in company performance (incl.: ability to generate returns on capital; equity; debt in relation to assets; and earnings per share) with growth in director pay (incl.: basic salary; incentives such as pension, health insurance and company car schemes; and bonuses such as shares and cash bonus payments) over the fiscal period 2008/09 to 2012/13.

The report concludes that 'performance exceeded pay' at 65% of FTSE 100 companies, while 'pay exceeded performance' at the remaining 35%.

Table 1. Growth in executive director average pay versus Verum Index of company performance 2008/09 to 2012/13:

               Company                                Company          Verum
                                   Verum Index                         Index
               (top 15)             position*       (bottom 15)      position*
    Centrica                            1       Royal Dutch Shell        86
    GKN                                 2       AstraZeneca              87
    Severn Trent                        3       Standard Chartered       88
    Persimmon                           4       CRH                      89
    Prudential                          5       Old Mutual               90
    Burberry Group                      6       Anglo American           91
    Hargreaves Lansdown                 7       GlaxoSmithKline          92
    Melrose Industries                  8       Wolseley                 93
    ITV                                 9       SABMiller                94
    British Sky Broadcasting Group     10       WPP                      95
    Croda International                11       Glencore Xstrata         96
    Fresnillo                          12       Easyjet                  97
    Land Securities Group              13       Smith & Nephew           98
    BT Group                           14       Lloyds Banking Group     99
    Aviva                              15       Barclays                100

Source: Verum Financial Research

In other key findings, the report highlighted a decrease in the number of executive directors, an increase in the number of non-executive directors, and the extent to which director pay has outstripped average pay:

Number of FTSE 100 exec directors down 5.8% (349 to 329) in 2008/09 - 2012/13
Number of FTSE 100 non-exec directors up 6.1% (725 to 769) in 2008/09 - 2012/13
Average pay of a FTSE 100 exec director up 13.6% in 2008/09 - 2012/13
Average pay of a FTSE 100 non-exec director up 11.1% in 2008/09 - 2012/13
Average pay of all UK employees up 2% in 2008/09 - 2012/13 (a 10% real terms fall)

Bonus culture is alive and kicking

The Verum research found that, while the basic salary component of an average FTSE 100 executive director's pay increased by 7% between 2008/09 and 2012/13 (from £0.60m to £0.64m), incentives increased by 24% (from £0.2m to £0.24m) and bonuses by 18% (from £0.47m to £0.56m) over the same period. In particular, in 2009/10, while the overall performance of all FTSE 100 companies rose by 2% according to the Verum Index, the bonus element of executive director pay increased by 28%.

The average pay of a FTSE 100 executive director in 2012/13 was £1.45m. For a non-executive director it was £137,527. However, it should be noted that many directors hold roles at more than one company, so their income will often be much higher.

Verum Financial Research spokesman, Robert Macnab, commented: "The gulf between average income and executive pay was initially highlighted by the scandal surrounding Fred Goodwin's retirement package from the Royal Bank of Scotland in 2009. From an investor perspective, there is real concern that bonuses and incentives have become detached from performance, that they have become almost part of fixed pay.

"Our research suggests that the metrics commonly used by FTSE 100 companies to benchmark director remuneration- Total Shareholder Return (TSR**) and Earnings Per Share (EPS) - have serious shortcomings. TSR can be influenced by generous dividend policies and EPS can be enhanced by higher borrowings. This goes some way to explaining the 'ratcheting effect' in director pay.

"The Verum Index is based on a broader set of fundamental performance metrics, including: Return On Capital Employed (ROCE), Return On Investment (ROI), Return On Equity (ROE), Cash Return On Invested Capital (CROIC), Cash To Profit Ratio (CTP), Earnings Per Share (EPS), Profit After Tax (PAT), Assets To Debt (ATD) and Equity To Debt Ratio (ETD). It is a better way to evaluate director remuneration and a valuable new tool for both investors and pay structure decision makers.

"Interestingly, if total executive director pay for all FTSE 100 companies had been benchmarked against the Verum Index, it would have been around 20% higher than the actual figure of £482m in 2011/12. You could argue that the directors at the best performing companies are substantially underpaid. Equally, shareholders in those companies towards the bottom of the Verum Index may well have questions for their senior management teams."

Notes To Editors

There is a "Robert_Macnab" JPG to go with this release.

Robert Macnab is available for interview.

*The Verum Executive Director Pay Index is based on executive director average pay over the period 2008/09 to 2012/13 weighted by total company executive director average pay relative to the mean. The index of companies in the table is the difference in absolute growth in director pay and company performance (based on the Verum composite of performance metrics) weighted by total company pay relative to the mean over the period 2008/09 to 2012/13. Each company's score is rebased as an index with the company with the largest difference in performance over pay weighted by total pay representing 100. Weighting by total company pay takes into account a company's total amount of director pay relative to the mean average. Companies with a large difference in performance over pay but with a high level of total director pay will rank lower in the index than a company with a large difference in performance over pay but with a lower overall level of total director pay.

**TSR measures dividends paid and the share price change over a given period.

Verum Financial Research is a trading division of Zabuloe Limited. As an independent research organisation, it relies entirely on sales income from its published research. It is not sponsored or commissioned by any third party. Verum employees are members of the UK Market Research Society (MRS) and all research is carried out in accordance with the MRS professional code of conduct.

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SOURCE Verum Financial Research