The five highest paid CEOs in the UK in 2014 were WPP‘s (LSE: WPP) boss Sir Martin Sorrell, Royal Dutch Shell’s (LSE: RDSB) now former CEO Peter Voser, CEO of real estate company Crest Nicholson Holdings (LSE: CRST) Stephen Stone, credit company Experian’s (LSE: EXPN) Don Robert and Vodafone’s (LSE: VOD) CEO Vittorio Colao, all earning over £12 million*
It’s a lot of money by anyone’s standards, but were they all worth it?
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…
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.
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.
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%.
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.