Executive Directors’ Remuneration
MM&K/Manifest Survey Seminar Launch
Monday 10 June 2013
Agenda:
• 5:00pm Registration, coffee and networking
• 5:30pm Chairman’s Welcome and Opening Address
• 5:35pm Keynote Presentations
Survey highlights - Cliff Weight, Director, MM&K
Shareholder engagements and voting results - Sarah
Wilson, Chief Executive, Manifest
• 6:00pm Panel Debate with
Cliff Weight
Sarah Wilson
Dr Daniel Summerfield, USS
chaired by Deborah Hargreaves,
with contributions from the floor
• 7:00pm Seminar ends followed by drinks
Survey Results
Cliff Weight, Director,
MM&K Remuneration Consultants
Agenda
• Context
• Definitions
• Differences of Averages and Medians
• Total Remuneration Realised
• Total Remuneration Awarded
• Comments on BIS proposals
2
Context - Corporate Governance Changes
• Voting
– Advisory vote on payments made
– Binding vote on future policy
• Disclosure
– Single figure of total remuneration
– 5+ year history of TSR, single figure, bonus %
and LTIP % vesting
– Scenario analysis of future policy
– No surprises
3
Communicating Pay to Shareholders
- a window on the soul of the company
Process
Performance
measures
• A well-managed process – with a properly
constituted remuneration committee which
operates independently, appoints expert,
professional, independent remuneration
consultants to assist it, listens to shareholders
and management and evaluates their inputs
– is a good sign that other corporate
governance will be effective.
• The choice of performance measures and
their relative importance in the delivery of
performance-related pay is the second
window on corporate governance, as they
indicate what is felt to be important in the
company.
How directors and senior managers are remunerated provides an important window
on corporate governance more generally.
4
Realised remuneration
Pay award decisions
DIMENSIONS OF REMUNERATION
Time 0
(Jan 01)
Bonus opportunity
Salary
(e.g. £1m)
Remuneration committee sets
max. and on-target opportunity
(expressed in % of salary)
Performance
Time 1
(Dec 31)
Long term incentive
Awards decided by the
remuneration committee
Performance
Realised Deferred
(poss. matched
grant if voluntary
deferment)
Key issue: valuation
 Face value of shares?
 Expected value (rule of
thumb or Black Scholes?)
 Modelling for the future?
Time 3
(+ 3 yrs or more)
Realised value
TOTAL PAY
Time n
(After retirement)
Pension
Normally entitlement is
defined in contract of service
and only changes with salary
level
Can be further deferral of LTI
after performance conditions
are met
Note: Total reported pay is driven by decisions made at
different points in time and does not necessarily reflect
current market conditions.
Some users (e.g. press) use realised value from prior
year grants to criticise pay increases
MM&K, Y. Chahed & L. Goh (LSE), 2011
Defined Benefit
(DB = x% of final salary)
 Value depends on accrual
rate, which drives the x%
(eg 1/30th for each year of
service)
 Final salary (eg highest
12months in last three years)
OR Defined Contribution
(DC = y% of salary)
OR Cash Salary Supplement
(SS = y% of salary)
¼ tax
free at
retirement
¾ paid as pension
until death of
executive and then
widow(er)s pension
until their death
Total Remuneration Survey Definitions
Realised
Awarded
Salary
Bonus
Deferred Bonus
Paid in year
Paid for year
Value Vested in
year
Same
Same
Value Deferred
LTIPs
Expected Value
Options
Value Vested in
year
Gain on Exercise
Pensions
Complicated
Same
Expected Value
6
Total Remuneration Survey Definitions
Share
price
Realised
Awarded
Salary
Bonus
Deferred Bonus
Paid in year
Paid for year
Value Vested in
year
Same
Same
Expected Value
LTIPs
Options
Value Vested Option
in
Expected Value
year
Gain
Gain on Exercise
Expected Value
Pensions
Complicated
Vests at 3 years
Same Exercise price
Time
7
Total Remuneration
Realised
Awarded
LSE Listing
Rules
BIS – single
figure
Salary
Paid in year
Same
Same
Same
Cash Bonus
Paid for year
Same
Same
Same
Deferred
Bonus
Value Vested in Value Deferred
year
Value Deferred
Value Deferred
LTIPs
Value Vested in EV
year
FV at award
Value Vested
for year
Options
Gain on
Exercise
EV
FV at award
Gain at date of
vesting
Pensions
Complicated
For DB =
increase in TV
of accrued
pension
same
Actuarial GN11 20x inc in
accrued
pension
EV = Expected Value
FV = Face Value
8
TRR
Latest
109,832
2,336,182
7,349,176
2,536,849
4,545,009
1,835,560
2,329,894
6,441,480
6,591,441
2,246,648
4,098,580
2,941,209
7,645,027
1,994,024
4,622,238
1,460,121
4,443,208
4,504,627
6,124,609
2,209,720
1,996,000
4,447,348
8,696,797
1,869,952
1,888,658
1,588,541
895,600
549,000
1,966,600
1,519,384
1,808,000
2,851,291
2,500,000
373,759
4,439,287
2,268,174
817,351
3,036,158
5,446,492
8,337,658
1,306,139
3,046,465
1,653,000
5,277,165
3,886,898
2,782,811
8,213,682
3,492,186
9,358,567
4,235,260
8,018,252
6,650,854
9,690,658
3,377,163
2,485,878
4,591,365
4,846,112
3,012,788
5,080,095
7,960,340
3,477,608
6,234,928
8,188,834
12,162,890
5,067,376
3,852,128
6,140,665
4,410,273
9,724,005
4,516,814
5,759,667
6,376,572
16,901,241
8,353,092
TRR
Previous Year
2,516,023
9,025,143
23,792,621
6,180,209
9,182,308
3,395,423
4,282,149
9,818,324
9,711,926
3,240,120
5,800,967
3,754,024
9,744,134
2,498,631
5,707,865
1,782,000
5,388,297
5,324,919
7,151,274
2,558,453
2,265,000
4,952,044
9,641,836
2,066,975
2,004,774
1,674,625
940,403
562,768
2,010,900
1,548,605
1,795,339
2,800,783
2,454,000
358,000
4,208,869
2,133,357
755,449
2,796,333
4,923,923
7,526,992
1,160,369
2,601,449
1,408,000
4,425,682
3,254,579
2,295,874
6,417,717
2,699,773
7,201,168
3,157,706
5,885,402
4,846,845
6,986,177
2,360,307
1,620,125
2,979,269
3,137,000
1,899,403
3,199,851
4,876,024
1,873,835
3,323,751
4,060,510
5,885,277
2,310,948
1,737,214
2,676,000
1,671,984
3,636,731
1,618,361
2,035,000
1,900,554
4,937,859
1,935,194
% Increase
-96%
-74%
-69%
-59%
-51%
-46%
-46%
-34%
-32%
-31%
-29%
-22%
-22%
-20%
-19%
-18%
-18%
-15%
-14%
-14%
-12%
-10%
-10%
-10%
-6%
-5%
-5%
-2%
-2%
-2%
1%
2%
2%
4%
5%
6%
8%
9%
11%
11%
13%
17%
17%
19%
19%
21%
28%
29%
30%
34%
36%
37%
39%
43%
53%
54%
54%
59%
59%
63%
86%
88%
102%
107%
119%
122%
129%
164%
167%
179%
183%
236%
242%
332%
Top 100 Average and Median
Increases, and Average of Increases
Increase in average
Median increase
Average of increases
10%
8%
30%
2012 £4.25m
2011 £3.86m
TOTAL REMUNERATION REALISED % INCREASES
400%
300%
200%
100%
0%
-100%
9
Salary Increases –
Latest Data
Top 100 – Average Salary
2011
£849,509
2012
£861,594
% increase 1%
Median increase 2.7%
16%
14%
Upper
Quartile
12%
Median
10%
Lower
Quartile
8%
6%
4%
2%
0%
<30
31-100
101-300
3011,000
1,0013,000
Company Turnover £ millions
3,00110,000
>10,001
10
CEO Salary + Bonus Awarded- Average of FTSE 100.
Shift to deferred bonus results in reduction in cash bonus, but
masks future increases in deferred bonus payouts
3,000,000
2,500,000
188%
168%
2,000,000
Deferred
Bonus
93% 74%
1,500,000
Cash Bonus
1,000,000
Salary
500,000
-
1998
1999
2000
2001
2002
2003
2004
2005
2006
2007
2008
2009
2010
2011
2012
Deferred Bonus is value deferred in the year, on this slide
11
LTIPs – How they work - Example
Max £1.9m
Expected Value
£1.167 m
£1,198,000
2009
AWARD
2012
X
PERFORMANCE CONDITIONS
% of Max VESTING
62%
1,556,000
2012
+ SHARE PRICE CHANGE
+ DIVIDENDS
+30%
12
LTIPs Realised
7,500
7,000
FTSE 100 Index
6,500
Impact of share prices on LTI payouts
2008 LTIP awards had 8% increase in share prices
6,000
5,500
5,000
4,500
4,000
3,500
3,000
01/01/2008
01/01/2009
01/01/2010
01/01/2011
01/01/2012
01/01/2013
13
LTIPs – Comparison of 2011 Realised and 2012 Realised
Max £1.9m
Expected Value
£1.167 m
2009
AWARD
1,556,000
1,198,000
X
2012
2012
PERFORMANCE CONDITIONS
% VESTING
62%
+ SHARE PRICE CHANGE
+ DIVIDENDS
+30%
Max £2.5M
Expected Value
£1.480 m
2008
AWARD
959,000
X
2011
PERFORMANCE CONDITIONS
% VESTING
39%
1,102,000
2011
+ SHARE PRICE CHANGE
+ DIVIDENDS
+15%
14
LTIPs – Comparison of 2011 Realised and 2012 Realised
+41%
-21%
Max £1.9m
Expected Value
£1.167 m
2009
AWARD
1,556,000
1,198,000
X
2012
2012
PERFORMANCE CONDITIONS
% VESTING
62%
+ SHARE PRICE CHANGE
+ DIVIDENDS
+30%
Max £2.5M
Expected Value
£1.48 m
2008
AWARD
959,000
X
2011
PERFORMANCE CONDITIONS
% VESTING
39%
1,102,000
2011
+ SHARE PRICE CHANGE
+ DIVIDENDS
+15%
15
£4,500,000
CEO Total Remuneration Realised - Average of FTSE 100
increases by 10% to £4.25 million
£4,000,000
£3,500,000
£3,000,000
LTI
1,535,973
+40%
2,157,448
Cash Bonus
£2,500,000
£2,000,000
Other
£794,063
-19%
£640,261
£1,500,000
£1,000,000
£500,000
£581,481
-13%
£506,701
£849,509
+1%
£861,594
Pension
Salary
£0
2011
LTI includes deferred bonus realised, in this slide
2012
16
SURVEY RESULTS - Summary
Total Remuneration
MEDIAN
Realised
+8%
Awarded
+1%
AVERAGE
+10%
-5%
Due to payouts realised
(vested) from LTIs
awarded 3+ years ago
£4,500,000
CEO Total Remuneration Realised - Average of FTSE 100
increases by 10% to £4.25 million
£4,000,000
£3,500,000
£3,000,000
LTI
1,535,973
+40%
2,157,448
Cash Bonus
£2,500,000
£2,000,000
Other
£794,063
-19%
£640,261
£1,500,000
£1,000,000
£500,000
Due to Rem Com
decisions in the year.
Awarded = expected
value of awards
Salary
£581,481
-13%
£506,701
£849,509
+1%
£861,594
£0
2011
Pension
2012
17
£5,000,000
Total Remuneration Awarded and FTSE 100 Index (excludes dividends)
£4,500,000
£4,000,000
LTIP EV
£3,500,000
Otpions EV
FTSE 100 Index at 31 Dec
Def Bonus
£3,000,000
Bonus
Other Remuneration
£2,500,000
Pension
Salary
£2,000,000
FTSE100
£1,500,000
£1,000,000
5,896
6,268
6,296
5,165
3,567
£500,000
£0
1998
1999
2000
2001
2002
4,391
2003
4,814
2004
5,618
6,221
6,457
4,562
2005
2006
2007
2008
5,412
2009
6,014
2010
5,700 5,898
2011
2012
18
Moderation in Award Levels
• Total Remuneration Awarded up just 1% for
FTSE 100 CEOs (Median). Average reduced by
5%.
• Is this the effect of the Shareholder Spring?
• Impact of deferred bonus understates pay by
about 8%
19
FTSE 100 Average CEO Pay v. Company
Size – BIGGER NOT BETTER
500
450
Total Remuneration
Awarded (EV) £
400
350
Turnover £bn
300
250
Market
Capitalisation £bn
200
150
100
FTSE 100 Index in
000's
50
1998 1999 2000 2001 2002 2003 2004 2005 2006 2007 2008 2009 2010 2011 2012
•
•
•
•
•
Indexed data back to 1998.
Pay has increased as has turnover and since 2003 market cap.
However pay has increased much faster than the FTSE 100 index.
What might change the long term trends?
Can pay keep rising?
20
CEO costs 2.7 basis points
•
•
CEO total rem = £4.5 million
_______________________
Market cap = £17 billion
= 0.027%
Figures are for average The top 100 CEOs
21
CEO costs 2.7 basis points
•
•
CEO total rem = £4.5 million
_______________________
Market cap = £17 billion
= 0.027%
Figures are for average The top 100 CEOs
3.5
CEO Pay / Market Cap (bp = basis points)
3.0
2.5
2.0
1.5
1.0
0.5
-
1998
1999
2000
2001
2002
2003
2004
2005
2006
2007
2008
2009
2010
2011
2012
22
BIS Proposal re 5/10 year disclosure- example
Single Figure
of Total
Remuneration
£000
Annual variable
element award
rates against
maximum
opportunity
Long term
incentive vesting
rates against
maximum
opportunity
2013
CEO2
4,516
83%
100%
2012
CEO2
4,771
90%
0%
2011¹ CEO2
2,250
93%
0%
2011
CEO1
4,245
82%
100%
2010
CEO1
3,958
93%
0
2009
CEO1
3,895
89%
67%
DISCLOSURE CONSEQUENCES
Year
Salary
Bonus
LTI
Total
Total
Realised Remuneration Remuneration
Received
Awarded
0
2
4
1
1
1
2
1
1
0
2
4
3
1
1
0
2
4
4
1
1
0
2
4
5
1
1
10
12
4
Total
5
5
10
20
20
Average
per year
1
1
2
4
4
24
Comparison of FTSE 100 index performance and
average Top 100 CEO Remuneration
5,000,000
20%
4,000,000
10%
3,000,000
0%
-10%
2,000,000
CEO Pay in £
Increase in the FTSE 100 index in the year (%)
30%
FSTE 100 index % change
-20%
Total Remuneration Awarded
-30%
1,000,000
Total Remuneration Realised
-40%
2001 2002 2003 2004 2005 2006 2007 2008 2009 2010 2011 2012
25
Ratio CEO to Average Employee
Trend Data for Total Remuneration of CEO and Average Employee
CEO Total
Remuneration
Awarded
2002
£2,599,551
£24,182
107
2003
£2,786,143
£24,767
112
2004
£3,087,028
£25,955
119
2005
£3,304,533
£27,254
121
2006
£3,308,814
£30,828
107
2007
£3,876,921
£25,677
151
2008
£3,958,000
£30,994
128
2009
£3,895,000
£32,521
120
2010
£4,245,000
£34,176
124
2011
£4,770,946
£35,744
133
2012
£4,516,474
£33,967
133
CEO Total Remuneration Awarded and Average Employee Earnings
Average Employee CEO as Multiple of
Earnings
Average Employee
160
£6,000,000
CEO Total Remuneration Awarded
Average Employee Earnings
140
CEO as Multiple of Average Employee
£5,000,000
120
(see note)
£4,000,000
100
80
£3,000,000
% increases
CEO Total
Remuneration
Awarded
Average Employee CEO as Multiple of
Earnings
Average Employee
2003
7%
2%
5%
2004
11%
5%
6%
2005
7%
5%
2%
2006
0%
13%
-11%
2007
17%
-17%
41%
2008
2%
21%
-15%
2009
-2%
5%
-6%
2010
9%
5%
4%
2011
12%
5%
7%
2012
-5%
-5%
0%
74%
40%
24%
6%
3%
2%
cumulative
02-12
average p.a.
02-12
60
£2,000,000
40
CEO as Mulitple of Average Employee
Year
£1,000,000
20
0
£0
2002
2003
2004
2005
2006
2007
2008
2009
2010
2011
2012
The FTSE100 companies employ around six million people.
The apparent 2007 drop in employee remuneration is largely caused by G4S plc entering the FTSE 100. It employs over half million people with a low average pay.
26