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New index fixes the broken link between FTSE 100 director performance pay and company performance

Analysing the company accounts of those in the FTSE 100 on 12 July 2013, the Verum FTSE 100 Company Pay Report found that the growth in bonus payments to executive directors exceeded growth in company performance at 46% of FTSE 100 companies over the fiscal period 2008/09 to 2012/13. It says this lack of correlation, which has fuelled & lsquo;fat cat’ headlines and concern among shareholders, is due to FTSE 100 companies using the wrong financial metrics to benchmark performance-related pay.

To illustrate the limitations of the metrics commonly used by FTSE 100 companies, Verum looked at the three main elements of pay: basic salary, bonuses (cash and share bonuses) and other benefits (including pension, health insurance and company car schemes). It found that between 2008/09 and 2012/13 the basic salary element of FTSE 100 executive director pay rose by 7%, bonuses by 24% and other benefits by 18%.

Table1. FTSE 100 exec director avg pay (salary, bonuses and benefits) 2008/09-2012/13:

Basic salary

Bonuses

Other benefits

Total

2008/09

&pound600,191

&pound474,299

&pound197,388

&pound1,271,878

2009/10

&pound618,723

&pound607,902

&pound190,695

&pound1,417,320

2010/11

&pound615,878

&pound645,940

&pound208,292

&pound1,470,109

2011/12

&pound661,142

&pound618,978

&pound236,780

&pound1,516,900

2012/13

&pound641,948

&pound558,485

&pound244,668

&pound1,445,101

Source: Verum Financial Research

The Verum FTSE 100 Company Pay Report reveals that average executive director bonus pay peaked in 2010/11 at &pound645,940 before falling by 13.5% to &pound558,485 in 2012/13, still considerably higher than the pre-recession level. Further still, cuts to bonus payments since 2010/11 have been offset by a 17.5% increase in other benefits, which rose from &pound208,292 in 2010/11 to &pound244,668 in 2012/13.

Table2. Index of FTSE 100 exec director avg pay v company performance 2008/09-2012/13:

2008/09

2009/10

2010/11

2011/23

2012/13

FTSE 100 companies performance Index*

100

102

116

135

103

FTSE 100 average exec director bonus pay Index*

100

128

136

131

118

Source: Verum Financial Research

Verum’s director of research Robert Macnab said: “Our in-depth study confirms that the link between performance-related bonuses and actual company performance is broken. The clearest indication of this is that, according to the Verum Index, the performance of all FTSE 100 companies increased by only 2% in 2009/10 yet the bonus element of exec director pay increased by a massive 28% (see Table2). Overall, total executive directors’ bonus pay increased on average by 5% per annum between 2008/09 and 2012/13, while total FTSE 100 company performance increased by only 2% per annum.

“We also found a huge variation in executive director pay across the FTSE 100, ranging from a five-year average low of &pound384,220 to a five-year average high of &pound5,248,454. Some companies with low to moderate executive director pay – Severn Trent, Hargreaves Lansdown, Aggreko, Croda International, Melrose Industries, Land Securities Group, GKN, Legal and General Group, IMI, Persimmon and Fresnillo – were some of the FTSE 100’s strongest performers between 2008/09 and 2012/13, so high pay doesn’t guarantee better performance.

“Executive director performance pay is too often benchmarked against a small number of easily influenced metrics. The Verum Index is based on a broader set of fundamental values, 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 investors and HR professionals.”

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