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Skin in the game

As the lines between the chief executive and the finance director get all the more blurred, so their pay packages have started resembling one another more closely. This is good news for FDs whose contribution to value creation and contact with the risk-reward metric is ever more keenly illustrated in their remuneration packages.

But there is an emerging debate about the contribution that share awards make to the FD’s personal commitment to that goal.

A surprising piece of research earlier this year by Directorbank, which polled 342 directors across all sectors of UK business (25 of them FDs and some former FDs), found that while FDs generally agree that they should hold the same equity stake
in their business as the CEO, other directors believe FDs need only hold between 50 and 60 percent of the equity their CEO does. Forty-one percent of the other directors surveyed, which included chairmen, chief executives and non-executive directors, thought FDs should receive less than half the share awards of their CEOs.

“Would I invest in a business in which the FD had no equity interest?” asks Simon Ball, deputy chairman of Cable & Wireless and a former FD at private equity group 3i. “Probably not.”

Equitable equity
Finance directors simply do not see why they should not be awarded the same equity stake as their CEOs.

“FDs were saying: ‘look, my role is every bit as important as the CEO’s. Why shouldn’t I have the same incentive?’ ,” John Pearce, executive director of Directorbank says of the research. And he believes there are two reasons for this.

First, the FD is often seen as the deputy leader if the CEO is for any reason rendered unavailable. Second, many FDs, far from straining for the CEO’s job, are happy in their role but feel that share awards are an important part of being recognised as an equal.

Both reasons, says Pearce, stem from the shift in the boardroom towards financial analysis becoming much more important. “It’s becoming more and more accepted that the CEO and the FD are a double act,” he says. “I guess remuneration will start to reflect that – and I guess it should.”

As Pippa Miller, chief financial officer of financial services firm AES International puts it: “If the FD contributes to the success of the company to the same extent as the CEO and has the same burden of responsibility, then they should be remunerated accordingly.”

First among equals
Duncan Brown, director of reward services at the Institute for Employment Studies, is on the side of the FD in obtaining the same share award as their CEO.

“I think the job of the FD is now seen as first among equals,” he says. “That has given them, in some cases, a salary premium over other board jobs.”

Swag Mukerji, CFO of Safetykleen Europe, goes further. “The CFO has the most difficult role on the board,” he tells Financial Director. “He has to balance the necessity to commercially support the CEO while simultaneously acting as the eyes and ears of the board and particularly the non-executive directors.”

This, he says, is the argument for significantly closing the gap between the equity stakes of the CEO and the CFO.

Mukerji says that in enlightened companies this is already happening.

But perhaps FDs should be careful what they wish for. CEOs often suffer criticism  for their short-termism, for being too eager to cash in on the instant value-creating gratification of acquisitions and too focused on quarter to quarter rather than year to year.

An inequality in equity may seem a small price to pay for the CEO who bears the brunt of what can be intense media scrutiny when something goes wrong.

“Any good FD should aspire to have a unique relationship with their CEO, as their confidant, conscience and foil,” Richard Pennycook, finance director at FTSE-100 supermarkets group Morrisons says. “But the CEO ultimately carries the weight of responsibility and is inevitably going to be rewarded for that.”

 

Janet Williamson, corporate governance expert with the Trades Union Congress, says: “There are arguments that substantial equity stakes create excessive micro-managing of the share price over and above longer-term value generators. Shareholder interests are better served by ensuring success over the next 10 to 20 years.”

Thorn in the side
Too much skin in the game may well skew the FD’s sense of being the necessary thorn in the side of the board, the voice of dissent on an idea carrying too much risk or lacking in consideration of long-term value creation.

If some FDs want superstar reward packages, or conversely would rather see the CEO reined in, one truism remains:

“It is always a team that delivers,” says Pennycook.

Concurring, Williamson says: “The board is meant to be a team. If there is a culture of competitive up-bidding among the board in terms of reward packages, there is a real danger that that culture filters down through the organisation.”
But there looks to be an ongoing conversation about FDs and share awards as part of remuneration versus what the CEO gets.

As UK businesses become more like those in the US – where the CEO more frequently carries the cult of personality and the requisite remuneration demands – FDs inevitably will move in a likewise direction, particularly against the backdrop of pressure to find and build growth.

Finance directors do not see why that should be seen as less valuable and therefore less able to be recognised with the same number of shares as the CEO will get.

Richard Guest, CFO of Stock Spirits Group, says: “I think the UK is moving towards the ‘CEO superstars’ mentality of the US. You see it in the FTSE-100 and in private equity.”

If reward is linked to value creation, says Guest, then “it’s win-win”.

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