THE INTENSE spotlight on executive pay – an ever-present reminder of company excess and fat-cat bonuses that reached fever pitch during the ‘Shareholder Spring’ two years ago – remains firmly on the national agenda.
The government has now stepped in with a new regime for directors’ remuneration reporting and binding votes on pay policy, while the UK reporting watchdog is considering changes to the UK corporate governance code specifically related to executive pay.
In this environment of governmental scrutiny and shareholder activism, the period of rising executive pay – not to mention the fees paid to non-executive directors – has come to an end. According to the latest Financial Director salary survey, the total average pay of FTSE 100 finance chiefs in 2012/13 slipped by 2.8% compared to the previous financial year.
Using data compiled by Manifest, the global proxy voting and corporate governance support service, based on companies’ 2013 annual general meeting, FTSE 100 finance directors took home £1,096,863 on average over the past financial year, while their counterparts in the FTSE 250 received a 25.8% average increase in total pay to £696,602.
The pay packets of finance chiefs at Britain’s top companies still lag behind those of chief executives, who on average earn a total pay package of £4.3m – a figure that includes their salary and bonus – according to a recent report from the High Pay Centre, an independent think-tank.
Indeed, only 64 FDs took home total earnings of more than £1m and no FD had a base salary higher than £800,000 – though this was an improvement on last year when 57 finance directors earned in excess of £1m.
When taken as a whole, the base salary of the total FTSE 350 index remained largely static, with CFOs earning a collective £100.9m this year, compared to 100.8m in 2011/12.
Yet the think tank report, which calculates that FTSE 100 chief execs earn about £1,100 per hour, shows how perceptions over excessive pay remain embedded in the public psyche.
In January, there was some consternation and opprobrium directed at the Royal Bank of Scotland after it emerged Ross McEwan, the bank’s chief executive, had been handed £1.5m in free shares on top of his £1m pay.
Most often the focus, as well as the ire, has been directed at directors’ bonuses, which in the case of the total bonus pool for FTSE 350 finance directors slipped by 5.5% to £98.8m from £104.6m. Yet it is bankers’ bonuses that have received the most criticism and have come to illustrate all that is wrong with City excess.
It is perhaps telling of how positive banks feel about their returning profits – Lloyds reported an underlying Q3 profit increase of 83%, compared to the same period the year before, and Barclays made a £2.8bn pre-tax profit on a group level for the first nine months of the year, a 202% increase on the first nine months of 2012 – that Barclays FD Chris Lucas was the only finance chief from one of the major banks to decline a bonus last year.
Lucas announced his resignation from the bank in February last year after six years in the role. Originally set to leave the bank next month, Lucas brought the date forward and stepped down in October due to ill health.
Having served as finance director during a challenging six-year period that encompassed the financial crisis, Lucas was one of the last top executives still at the bank following the Libor rate-rigging scandal, which led to the departure of chief executive Bob Diamond, chairman Marcus Agius and chief operating officer Jerry del Missier.
It is worth also noting that banking CFOs did not all receive the biggest bonuses, with only HSBC’s Iain Mackay and Standard Chartered’s Richard Meddings appearing in the top ten largest bonuses, picking up £1,348,000 and £1,328,479, respectively. RBS chief financial officer Bruce Van Saun – who has since moved to head up the bank’s US subsidiary Citizens – came in 16th, while Lloyds CFO Mark Culmer was ranked 36th.
Held to account
Nevertheless, bankers have been held up as the poster children of excess. Bank failures, the financial crisis and the recessions that ensued all led to questions about how much top bosses earned and how that is linked pay to value, as well as how executive remuneration is linked to long-term performance.
While there were far fewer investor rebellions over remuneration issues during the past year than was the case in 2012 – when several prominent companies suffered embarrassing defeats at the hands of their shareholders – investors now have a much greater say on how executives are remunerated than they have had in the past.
Under government rules that came into force last October, companies must be more transparent about how directors are paid. It is now a legal requirement for shareholders to have a binding vote on directors’ pay.
As a result of this change, the shareholders of about 900 quoted UK companies will be better armed when holding companies to account. The reforms, introduced by business secretary Vince Cable to create a clear link between pay and performance, mean investors will have access to clearer information in company reports.
One of the main effects of the changes is that all payments will be subject to a legally binding vote. Companies will have to stick to pay plans for the next three years or face another shareholder vote. Corporates will also need to report all elements of directors’ pay in a single, cumulative figure.
The FRC could take the legislation a step further and is consulting on changes to the corporate governance code to address a number of issues relating to executive remuneration. The regulator is consulting on three specific proposals: clawback arrangements; whether non-executive directors who are also executive directors in other companies should sit on the remuneration committee; and what actions companies might take if they fail to obtain at least a substantial majority in support of a resolution on remuneration.
However, there has already been some push-back from listed companies. In its response to the consultation, Weir Group claimed that there was no evidence to suggest any change to the current arrangement on clawback arrangements is required.
“A combination of the financial crisis and the current code provisions has already brought in the idea of … clawback to front of mind for all listed companies. This, combined with the new requirement for companies to seek shareholder approval for their remuneration policy by way of a forward-looking binding vote, will allow shareholders to express their views as to whether provisions adopted are sufficient,” said Melanie Gee, chair of Weir’s remuneration committee.
These changes will go some way to quell unrest over perceived excesses in executive pay. However, a new battleground appears to be emerging over long-term incentive plans. PIRC, the shareholder activist group, has derided the plans as poorly defined and less than long-term in nature, while Fidelity, one of the City’s most well-respected fund managers, has urged companies to extend the time senior executives must hold shares granted to them under LTIPs from three years to at least five.
Indeed, the Independent reported in January that Fidelity could reject a series of FTSE 350 pay packages if directors were to be handed free shares too soon – which would have allowed them to cash in those shares after three years. Fidelity will be able to use the new binding vote on pay policies to achieve this.
Nevertheless, there already is an element of long-termism in the way remuneration is being paid, judging by the numbers of bonus deferrals among top CFOs, as £20,131,661 worth of bonuses was deferred on a mandatory basis and £3,879,872 was deferred on a voluntary basis. Additionally, £1.2m worth of bonuses was taken as unconditional shares.
It is in the area of mandatory deferrals that banking finance directors are most prominent, with Van Saun at RBS ranking highest, deferring £980,000 – which equates to 100% of his total bonus. The FDs of HSBC, Lloyds and Standard Chartered all also appeared in the top ten finance directors deferring their bonuses on a mandatory basis.
The rules on executive pay came into force at the same time as a host of other changes to company reporting, such as the introduction of a statement on the gender balance at board level, in senior management and in the company as a whole, aimed at focussing attention on boardroom diversity.
For now, the glass ceiling for women in the profession seems to be firmly welded in place. Although the number of women taking the chief finance roles is increasing, they continue to lag behind their male counterparts in terms of earnings.
Top of the pile (and ranked 23rd overall) is Zaure Zaurbekova, CFO at Eurasian Natural Resources Corporation, who commands a total salary of £1,545,000. She will leave the rankings next year due to ENRC de-listing from the FTSE.
However, although she ranks higher than most of her competitors in the mining industry in total earnings, her basic salary lags behind them. Rio Tinto’s Guy Elliott earned £716,517; Anglo American’s Rene Médori is paid £765,000; and Glencore Xstrata’s Steven Kalmin picked up £700,000, compared to Zaurbekova’s base salary of £683,000. The CFOs of other natural resource companies, such as BP, BG Group and Royal Dutch Shell, were also all ranked higher in terms of base salary.
Another example of this – in the beverage industry – is Diageo’s Deirdre Mahlan. She is the third-highest-paid female, ranked 26 overall ahead of rival SABMiller’s James Wilson’s 28th. Although Mahlan was paid a total £1.3m, compared to Wilson’s £1.2m, her salary was £666,000, compared to his £720,000.
This tendency is repeated once again in the case of Cairn Energy’s Jann Brown, ninth-highest-paid woman. She had a basic salary of £416,000, compared to rival SSE’s Gregor Alexander, who earned £545,000 in basic salary – despite Brown ranking 109 in the overall chart with a total salary of £790,000, compared to 123-ranked Alexander’s £715,000.
As a very minor victory, the numberof women in senior finance roles does seem to be steadily increasing. Back in 2009, there were nine senior finance women in the FTSE 250, with Burberry CFO Stacey Cartwright taking the top spot. This compares to 17 in latest listing. However, as with every year, the finance directors change and companies leave and unfortunately this will bring down the number of women in the listing. Stacey Cartright has stepped down from Burberry and is now CEO of Harvey Nicholls. Other women who won’t be appearing next year also include Zaurbekova, as well as Standard Life’s Jackie Hunt, who steps down to take a CEO role at Prudential’s UK arm.
There is hope that more women will climb the ranks after the government initiative to see at least 20% of all board roles taken up by women by 2020, following the Davies Report. Women now account for about 19% of all FTSE 100 boards and 15% of FTSE 250 ones according to a report published by the Cranfield School of Management in November 2013.
Scrutiny is also being placed on how directors are paid off in the event that they resign or are sacked. Under the government rules, companies will also need to publish details of exit payments paid to departing executives.
Indeed, two out of top ten earners were people who announced their resignations during the year. Vodafone CFO Andy Halford will step down later this year after helping complete the sale of its $130bn stake in its US wireless business to Verizon.
Halford was in fact the highest-paid FD in the listing, earning a total of £2.5m, made up of a salary of £700,000, a bonus of £461,000 and other remuneration of £1.3m. Halford has been Vodafone’s CFO for nine years, during which time the company delivered £61bn in dividends to its shareholders.
Another top earner who made his way out of the door last year was Schroders CFO Kevin Parry, who picked up a £1.6m bonus – the highest of any FD – which he took as cash, and which dwarfs his base salary of a mere £300,000.
Not all departees took bonuses. Other than Lucas at Barclays, Simon Lowth at AstraZeneca, Richard Pennycook at Wm Morrison, Guy Elliott at Rio Tinto and Scot Merrillees at Bumi all left without a bonus.
So who were the other top earners on the listing? Other than the banking giants, the finance directors of natural resource companies ranked high up the list, with Royal Dutch Shell and Glencore Xstrata in the top ten FTSE 100 FDs – the second year running that those companies’ FDs have appeared in the top ten.
Paul Richardson, CFO of advertising giant WPP, also appears in the top ten for the second year in succession – and once again, he is ranked second, with total earnings of £2.2m. Richardson’s boss, Sir Martin Sorrell, is well known for his defence of his own pay arrangements, and will no doubt be pleased that his son, Richard Sorrell, has made his first appearance in the listing as finance director of Man Group, the hedge fund manager.
Sorrell junior earned total pay of £1.2m, placing him fifth in the ranking of FTSE 250 CFOs. He picked up a bonus of £911,484 – though he still has some way to go in order to catch up with his father, who was awarded £17.6m in total pay for 2012.
Perhaps, though, the most lucrative route that a rising CFO such as Sorrell can aspire to is that of a non-executive director. Many former FTSE finance chiefs move on to portfolio careers and it is easy to see why they do so, as the median base fee level for FTSE 100 chairmen stood at £361,000 in 2013. For non-executive directors, the median base fee is £61,000, a report by PwC found.
As FDs at AIM-listed companies earn about £174,000 when bonuses and other incentives are taken into account, and the average accountant earns about £68,400 in 2013, the attraction of the FTSE 350, despite the heightened pressure and increased scrutiny, is clear. ?
The Financial Director salary survey has been produced using data provided by Manifest, based on disclosure in 2012/13 annual reports and AGMs.
Remuneration information is provided for all companies where the finance director sits on the board of directors. In instances where the finance director is part of the management, but does not sit on the board, no information has been provided.
Constituents of the FTSE 350 are correct as of September 2013. All information relates to annual accounts for the 2011/2012 financial year, apart from those instances where no data was available.
Some finance directors featured in the list resigned from their roles during 2012, but feature in the list as remuneration terms were provided in their company’s annual accounts.
Name: Andy Halford
Index: FTSE 100
Total pay: £2,487,000
Halford is a cool £306,000 ahead of his closest rival, WPP’s Paul Richardson. Although Richardson’s bonus is higher than Halford’s, his pay is not.
However, first spot is up for grabs, with Halford due to step down this year. So far, no announcement has yet been made about what Halford plans to do next – except that he has taken a non-executive chairman role of Marks & Spencer’s audit committee.
His departure comes after the company announced it was selling its stake in US group Verizon, which Halford helped to broker – a deal that could see the CFO and other Vodafone shareholders receive a hefty payout.
Nick Read, Vodafone’s African Middle East and Asia Pacific head, will succeed Halford.
Name: Kevin Parry
Index: FTSE 100
Total pay: £1,906,000
Parry’s bonus comes in at £1,600,000 – ahead of his closest competitor, FTSE250 company Investec’s Glynn Burger, with £1,500,000.
However, Parry is no longer the CFO of the fund management company, having stepped down last year. He was succeeded by Richard Keers, previously at PwC which audited Schroders.
Parry joined the business in January 2009 but started out in KPMG and left to run the Management Consulting Group. While still working there, he took a non-executive role at Schroders in 2003, which six years later recruited him as CFO.
Name: Keith Adey
Index: FTSE 250
Total pay: £521,372
At a mere 34 years of age, Adey is the youngest by a few months. Adey enjoyed a salary of £223,000 as well as a bonus of £270,000. He was recruited to the board as group FD on 1 February 2012, having joined the business in 2008 as group chief accountant. Prior to joining the listed house-builder, Adey worked in the finance department of Grainger and before that worked in KPMG’s audit division.
Name: Zaure Zaurbekova
Company: Eurasian Natural Resources Corporation
Index: FTSE 100
Total pay: £1,545,000
Zaurbekova is the highest-paid woman in the listing. Her pay stands at £192,000 ahead of her closest female contender, Stacey Cartwright, who has left the listing to take a CEO role at Harvey Nicholls. However, Zaurbekova only just makes it into the top 20 highest-paid FDs in the FTSE 350 at 18.
She was promoted to the CFO role in September 2009, having been acting CFO since June of the same year. Prior to the promotion she was CFO at Kazakhstan Operations for eight years. Zaurbekova has previously worked in the Ministry of Industry and Trade of the Republic of Kazakhstan.
She will not make the list next year because Eurasian de-listed from the LSE at the end of 2013.
Name: Allen Roberts
Index: FTSE 250
Total pay: £393,000
Roberts joined the company as group finance director in 1979 – a whopping 35 years and still going in the role.
He trained with Peat Marwick, Mitchell & Co, which later merged with Klynveld Main Goerdeler to become KPMG, before joining Renishaw and stepping up to the board a year later.
Founders Sir David McMurty, who serves as chairman and CEO, and John Deer, who works as deputy chairman, are 73 and 75, respectively. They claimed in an interview with This is Money in 2011 that they had no plans to retire, which remains true. However, the oldest person working in the company, at the time of that interview, was Joseph Franks who – at 87 – remains the carbon coatings expert for the manufacturers.
Name: David Mathewson
Index: FTSE 250
Total pay: £148,812
As the oldest member of the FTSE 250 at 65, he was the non-executive director at the software company in the online gaming industry until – following a two-and-a-half-year search – the company asked him to take the finance chief role. One analyst commented that hiring a non-exec was a bit like finding your car keys in the first place you looked.
Although he is the oldest finance chief on the list, Mathewson described himself as “very young and frisky for 63” at the time of his appointment in 2011. Unfortunately, he has now stepped down from the role, with younger successor Ron Hoffman taking his place.
FTSE 250 highest earner
Name: Glynn Burger
Index: FTSE 250
Total pay: £1,829,134
His total salary gets him to 11th in the overall chart of the FTSE350 – one place ahead of Prudential’s Nicolaos Nicandrou and one behind RBS’ Bruce Van Saun.
He is currently group risk and finance director, with a basic salary of £315,163.
Burger joined the company in July 1980 and has worked in various positions, such as chief accounting officer, group risk manager and joint managing director of South Africa. He is currently director of Investec and a number of its subsidiaries such as Investec Bank, Investec Private Equity Management and Investec Finance.