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The Observer: It pays to be one of the top 10…

It pays to be one of the top 10…

… it can mean £27,000 a day. An exclusive survey for The Observer charts the rises in the benefits packages enjoyed by the heads of the UK's largest companies. Heather Connon reports

Sunday April 16, 2006
The Observer

The chief executives of Britain's 10 largest companies received salary and benefits packages worth an average of £6.5m last year, according to a detailed analysis of their remuneration prepared exclusively for The Observer. This was 11 per cent ahead of the total for the previous year.

Prepared for The Observer by consultancy Independent Remuneration Solutions (IRS), it is one of the only surveys to include all components of directors' pay – pensions, options and other share schemes as well as salary and bonuses. The 10 companies are worth £750m in total, equal to half the value of all FTSE 100 companies, and are used by remuneration consultants as a bellwether on which to base other companies' pay and perks packages.

The highest paid of the 10 executives was Jean-Pierre Garnier, chief executive of GlaxoSmithKline, the drugs group, with a package worth a total of £10.6m, a 16 per cent increase on 2004. He ran into a storm of protest in 2003 when the company sought shareholder agreement for a new incentive package, which some estimated could have been worth more than £20m. The package was withdrawn but Garnier's pay does not seem to have suffered much.

Next best-paid of the 10 top executives was Lord Browne, chief executive of oil giant BP, whose remuneration was £9,951,000 – more than £27,000 a day. While the largest component of that is from shares awarded under the company's long-term incentive plan, or LTIP, Browne also received the equivalent of a £2.8m payment into his pension plan, boosting the pot to £20m, enough for a pension of £1m a year when he reaches 60 in 2008.

Sir John Bond, who retires as executive chairman of banking group HSBC at its annual meeting in May, came in third, with £7.7m, including £1.3m in salary and a £3.2m bonus.

Arun Sarin at mobile-phone group Vodafone – where Bond is to become chairman following his departure from HSBC – received a package worth more than £7.2m, despite growing shareholder disquiet about his stewardship and a 10 per cent fall in its shares over the year, when the rest of the stock market rose by more than 15 per cent.

The lowest earner of the 10 was Eric Daniels at Lloyds TSB, whose £2.9m package was 16 per cent below the level in 2004 as his bonus fell by a third to £1m. The City expects Lloyds TSB to be among the slowest-growing banks, reflecting its exclusively domestic focus, while its dividend has remained the same for four years and no increase is expected this year either.

But Cliff Weight, the IRS director who prepared the survey, points out that Lloyds TSB has just submitted proposals for a new incentive package, which is seen as controversial by some investors. 'You usually find that, if salaries go down, it is not because [the companies] are taking the investors' complaints on board; it is because they are about to introduce a different scheme,' said Weight.

The biggest increase went to Sir Tom McKillop, outgoing chief executive of AstraZeneca, who takes over as chairman of Royal Bank of Scotland this month. His package rose almost 50 per cent to £4.6m, despite the fact that two of its drug trials were halted and sales of its Crestor cholesterol drug were disappointing.

Runner-up was Jeroen van der Veer of Shell, who enjoyed a 37 per cent increase, a third of it through the award of LTIP shares, despite continuing concern over the low level of oil reserves held by the group. AstraZeneca's shareholders were also well rewarded: its total return – taking both dividends and the share price rise into account – was best of the 10 at 52 per cent.

Elsewhere, however, there was less symmetry between bosses and shareholders. The total return for Royal Bank of Scotland's shareholders was lowest of the 10 at 4 per cent, but chief executive Sir Fred Goodwin's package still rose by 23 per cent.

IRS's analysis underlines the rapid growth in executive salaries, with the 10 enjoying an average increase of 16.8 per cent for the past six years while four of them – Browne, Van der Veer, HBOS's James Crosby and Goodwin – have seen their pay rise by at least 24 per cent.

IRS's figures use the standard method of valuing options and LTIPs, which takes account of the probability of their being awarded. An analysis of actual payments compared with estimates in previous surveys shows that executives actually got around 97 per cent of IRS's estimates of the value of the awards.

Weight believes that companies should be required to disclose a total remuneration figure such as the one included in the IRS survey in its annual reports and points out that the US – which has traditionally lagged behind the UK on remuneration guidelines – is introducing such a requirement.

'The government botched its 2002 directors' remuneration report regulations,' said Weight. 'They fail to require all remuneration to be shown in a single table and added up. Currently only salary, benefits and annual bonuses have to be totalled.'

The survey shows a shift away from straightforward share options, which let executives buy shares at a set price on a future date, in favour of long-term incentive plans, where shares are only awarded if performance criteria – usually based on total return to shareholders – are met. Only four of the 10 companies awarded options last year, while all had an LTIP.

But a large proportion of executive pay is not related to performance: the survey shows that salary, benefits and pensions – paid regardless of whether share price and profits rise or fall – account for an average of 43 per cent of the total package, and at HBOS it is 58 per cent.

Pensions: How to retire on £1m a year

Pensions are one of the biggest perks for senior executives: the increase in the transfer value of the pension pot of our 10 chief executives – roughly what they would receive if they decided to transfer their pension to another scheme – was usually the second-biggest component of their package, larger than their annual salary and, for half the companies, larger than their annual bonus payments too.

That means they are amassing sizable retirement nest eggs: Lord Browne at BP leads the pack with a £20m pot, enough for a pension of £1m a year, followed by Sir Tom McKillop with £12.6m and Sir John Bond with £10.7m.

The latter two are retiring from their companies but are immediately taking up new chairmanships, at Royal Bank of Scotland and Vodafone respectively. While their salaries there have not yet been disclosed, their predecessors earned £607,000 and £517,000 respectively.

The size of executive pensions is attracting considerable controversy. That is partly because ordinary employees are seeing the value of their retirement benefits fall as companies close final salary schemes or make other adjustments, such as requiring staff to work longer, contribute more or accept reduced benefits. But it is also because directors' pension payments, unlike bonuses and other incentive plans, are not related to their performance and do not have to be agreed by shareholders.

But that does not mean investors are ignoring them. The Association of British Insurers (ABI) has said it will monitor pension contributions closely this year and could take action if it believes there is evidence of abuse.

Indeed Peter Montagnon, head of investment affairs at the ABI, thinks there is a question over whether senior executives need pensions, given that so much of their remuneration is in the form of shares, which can be used as a retirement nest egg.

That is borne out by an analysis of the top 10 FTSE 100 executives' wealth carried out as part of the Independent Remuneration Solutions survey, which showed that, on average, each executive had amassed more than £8m in shares and options on top of an average pension pot worth a similar amount.

IRS's Cliff Weight points to companies such as HSBC, which awarded Sir John Bond a pay rise of £200,000 in 2004, when he was nearing retirement, as examples of how pension payments can be boosted.

'Most [companies] pretend that the highly lucrative pension plans are not part of total remuneration,' he adds.

America: Higher but slowing

British bosses may be well paid, but still look poor compared with the US. A survey of the 2005 salaries of 350 large American companies shows that their chief executives were paid an average of $6,830,200 (£3,900,700) last year. While that was below the average for our top 10 companies, consultancy Mercer – which carried out the survey – estimates that it is around twice what the average British chief executive could expect.

There is some evidence that pay rises are moderating: the average rise in total pay for the US executives was 7.1 per cent, half the level in 2004 and below the 10-year average of 7.9 per cent.

Pay rises also lagged behind corporate profits, which rose by an average of 13 per cent, though they were twice the rate of inflation and double the increases enjoyed by employees generally. Stephen Cahill, head of executive compensation in Europe for Mercer, said that the requirement to put pay to shareholder vote in the UK, introduced four years ago, has 'served to slow down some of the pay excesses and prevented individual executives getting too much'.

He believes that the US is moving towards British-style practices such as LTIPs, which have performance conditions and are gradually replacing share or stock options, which generally do not exist in America.

'UK shareholders are more cynical than those in the US about what drives company performance. There is less willingness here to accept that a chief executive is wholly responsible for an organisation's strong financial or share-based performance, which means shareholders expect more restraint on pay awards.'

Special report
Executive pay

Useful links
Confederation of British Industry
Institute of Directors
AFL-CIO Paywatch
Trades Union Congress
Department of Trade and Industry

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