FTSE 100 Company Pay v Performance

Verum Research, January 2014

INFORMATION PACK

Presentation flow

1. Research and methodology

2. Performance analysis and the Verum Index

3-4. The Verum Index – pay v performance

5. Bonus pay growth exceeds performance, 2008/09-21012/13

6. Metric correlation and variation

4-5. Pay growth – average executive and non-executive pay

7. Companies with highest pay and highest pay increases, 2012/13

8. Companies with highest pay and highest pay increases, 2008/09-2012/13

9. What can Verum’s research provide

10. Verum’s research reports

11. About Verum

In 2013, Verum carried out extensive research into FTSE 100 companies’ director pay over the

period 2008/09 to 2012/13 in an attempt to determine whether there is a link or correlation

between a company’s financial performance and its executive and non-executive pay.

The research

Research objective – to determine whether a link exists between a company’s

financial performance and its director pay

The methodology

The performance of each FTSE 100 company is measured by some fundamental key metrics

which are common to all companies irrespective of industry or market in which they operate.

These key metrics concentrate on a company’s ability to generate returns on capital,

investment, equity and cash compared with director pay which are of essential interest to

investors.

The elements of executive and non-executive pay that are analysed in this research are:

• Basic salary (Salary figure from director emoluments)

• Incentives (Non-performance related benefits including pension)

• Bonuses (cash and share bonuses but excluding: LTIPs and deferred shares).

The metrics or ratios used in the analysis of FTSE 100 company performance include:

• Return On Capital Employed (ROCE)

• Return On Investment (ROI)

• Return On Equity (ROE)

• Cash Return On Invested Capital (CROIC)

• Cash to Profit Ratio (CTP)

• Normalised EPS (N.EPS)

• Profit After Tax (PAT)

• Assets to Debt (ATD)

• Equity to Debt Ratio (ETD)

Performance analysis (metrics)

The Verum IndexThe Verum Index is a league table of companies representing the difference in absolute growth

in director pay and company performance (based on the Verum composite of performance

metrics) over the period 2008/09 to 2012/13 rebased as an index with the company with the

largest difference in performance over pay representing 100.

The Verum Index shows that bonus pay growth has exceeded performance at 46% of FTSE 100

companies over the period 2008/09 to 2012/13

The Verum Index – Pay v Performance

Source: Verum Financial Research

0 10 20 30 40 50 60 70 80 90 100

Centrica

Burberry Group

Prudential

British Sky Broadcasting Group

Randgold Resources

GKN

Persimmon

ITV

BT Group

Severn Trent

Fresnillo

Aviva

Melrose Industries

Standard Life

Croda International

Verum Index - performance in excess of ave pay

The Verum Index measures the difference between the growth in company director pay and

the growth in company performance as measured by the Verum composite of performance

metrics over the period 2008/09-2012/13. The following charts are based on a comparison of

company performance compared with average executive director pay.

Companies towards the top of the index may have had large increases or decreases in director

pay but this was offset by an increase in company performance (significant decreases in pay

rather than an increase in performance will also result in a high Index position).

Companies where performance growth has exceeded pay

The Verum Index – Pay v Performance

Source: Verum Financial Research

Similarly, companies towards the bottom of the index experienced either a significant increase

in director pay compared with performance, or a significant decline in performance compared

with director pay over the period 2008/09 to 2012/13.

Companies where pay growth has exceeded performance

-50 -45 -40 -35 -30 -25 -20 -15 -10 -5 0

Johnson Matthey

Tullow Oil

Admiral Group

WPP

Carnival

CRH

Rexam

Glencore Xstrata

GlaxoSmithKline

Anglo American

Wolseley

Smith & Nephew

Easyjet

Lloyds Banking Group

Barclays

Verum Index - Performance below ave pay

Companies in the above chart may not have had substantial increases in director pay, but may

have experienced a decline in company performance, as measured by the Verum Index,

relative to director pay.

Pay growth – average exec pay

Source: Verum Financial Research

0.0

0.2

0.4

0.6

0.8

1.0

1.2

1.4

1.6

2008/09 2009/10 2010/11 2011/12 2012/13

£m

Basic salary Incentives Bonus

+11.4% +3.7%+3.2% -4.7%

£1

.27 £

1.4

2

£1

.47

£1

.52

£1

.45

% changeExecutive director average pay increased

overall by 13.6% between 2008/09 and

2012/13 from £1,271,878 (£1.27m) to

£1,445,101 (£1.45m). Basic salary increased

by 7.0%, Incentives (pension, health

insurance, company car) increased by 24.0%

and bonuses (cash and shares) increased by

17.1%.

Non-Executive director average pay

increased overall by 11.1% between

2008/09 and 2012/13 from

£123,759 (£0.12m) to £137,527

(£0.14m). Basic salary increased by

12.7% and accounted for 94.5% of

total pay in 2008/09 rising to 95.9%

in 2012/13.

Pay growth – average non-exec pay

Source: Verum Financial Research

If exec director total average pay (basic

salary + bonuses + incentives) for all FTSE

100 companies combined is compared

with the Verum performance composite, it

shows that total average pay falls below

performance overall for the period

2008/09-2012/13.

Bonus pay exceeds performance - All FTSE 100

Source: Verum Financial Research

But if exec average bonus pay is compared

with the Verum performance composite, it

shows that bonus pay exceeds company

performance overall for all FTSE 100

companies combined. Bonus pay

increased by 5% per annum between

2008/09-2012/13 while company

performance increased by only 2% per

annum.

100

128

136

131118

100102

116

135

103

90

100

110

120

130

140

2008/09 2009/10 2010/11 2011/12 2012/13

Exec Directors Ave Bonus Index

Composite Performance Index

100

112

116

119

114

100

102

116

135

103

90

100

110

120

130

140

2008/09 2009/10 2010/11 2011/12 2012/13

Exec Directors Pay Index Composite Performance Index

Profit After Tax and Return on Equity are

the ratios or metrics that are most closely

correlated with exec bonus pay. Cash-

based metrics are least correlated with

bonus pay.

The wrong ratios are being used to

benchmark director performance pay

against company performance!

Metric correlation and variation

Source: Verum Financial Research

Return on Investment (ROI) and Return on

Capital Employed (ROCE) have had a low

rate of variation over period 2008/09-

2012/13. Use of these ‘low variance’

metrics to benchmark pay results in low

variation in bonus pay and also pay

‘ratcheting’.

0

20

40

60

80

100

120

140

% V

ari

ati

on

Metric variation 2008/09-2012/13

-0.6

-0.4

-0.2

0

0.2

0.4

0.6

0.8

Co

rre

lati

on

Metric correlations with exec director bonus payments

FTSE 100 companies

with the highest

executive director

average pay in the

2012/13 fiscal year.

Highest pay and highest pay-increase companies

2012/13

Source: Verum Financial Research

0.0 0.5 1.0 1.5 2.0 2.5 3.0 3.5 4.0 4.5 5.0

Randgold Resources

Antofagasta

Royal Dutch Shell

HSBC Hldgs

AstraZeneca

Unilever

Barclays

Experian

WPP

Lloyds Banking Group

Companies with highest average executive director pay in 2012/13 financial year (£m)

0% 20% 40% 60% 80% 100% 120% 140% 160% 180% 200%

Capita

Reckitt Benckiser Group

Kingfisher

Weir Group

SSE

G4S

Unilever

Associated British Foods

Lloyds Banking Group

Admiral Group

Companies with highest increases in average executive director pay, 2012/13 financial year (%)

FTSE 100 companies

with the highest

increases in executive

director average pay in

the 2012/13 fiscal year.

FTSE 100 companies

with the highest 5-

year average

executive director

pay in the 2012/13

fiscal year.

Highest pay and highest pay-increase companies

2008/09-2012/13

Source: Verum Financial Research

FTSE 100 companies

with the highest

increases in executive

director average pay in

the 2012/13 fiscal year.

0 1 2 3 4 5 6

Randgold Resources

Experian

Antofagasta

AstraZeneca

Royal Dutch Shell

Smith & Nephew

Reckitt Benckiser Group

Unilever

HSBC Hldgs

Eurasian Natural Resources Corporation

Companies with highest 5yr average executive director pay, 2008/09-2012/13 (£m)

0% 5% 10% 15% 20% 25% 30%

Rexam

Lloyds Banking Group

Barclays

Legal & General Group

ITV

Intertek Group

Admiral Group

Imperial Tobacco Group

WPP

SSE

Companies with highest % average annual cumulative growth in executive director pay, 2008/09-2012/13

What can Verum’s research provide?

• Identify which companies have delivered real investor value in terms of pay versus

performance over the period 2008/09 to 2012/13

• Compare a company’s director pay and performance against other FTSE 100 companies

• Identify where individual companies rank in terms of total pay, average pay and bonus pay

against performance relative to other companies

• Identify which companies over-pay and under-pay their directors relative to performance

For investors or analysts?

For a FTSE 100 company?

• Justify director pay and reward policies in terms of actual performance to major investors

• Compare company director pay and performance against other FTSE 100 companies

• Use the Verum Index as a tool when considering the structure of future pay and reward

policies

• Use Verum’s research and the Verum Index to promote a company’s pay and performance in

the press and to investors.

The Verum advantage – independence!

Verum research reports

Available in two volumes:

1. Analysis of Director Pay by Component and by Company, 2008/09-2012/13

2. Individual FTSE 100 Company Pay and Performance Profiles, 2008/09-2012/13

Report sample pages:

About Verum

Verum Financial Research (Verum) is an entirely independent research company which

publishes research reports and information to the benefit of the wider investment market.

Employees of the organisation are members of the UK Market Research Society (MRS) and all

research is carried out in accordance with the MRS professional code of conduct. All research

is carried out in an ethical and professional manner and is conducted honestly and objectively

with the intent of providing independent information and analysis.

Verum Financial Research relies entirely on subscription or sale income from its published

research and is not sponsored or otherwise commissioned to produce and publish research

reports by any third party.

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