Companies in the UK collectively endured some of the worst economic conditions in living memory last year. With public cries of complaint still ringing in their ears about bankers’ bonuses and excessive executive pay, and markets in a state of almost unprecedented panic, AIM boards had some tough decisions to make.

Not least among these was how to balance shareholders’ interests with pay packages that would retain and motivate their executive directors. Would or should thoughts of self-interest be subsumed by the greater good?

‘In smaller companies like ours, there’s a responsibility to your shareholders – and everyone, especially the CEO, should take that on,’ argues Jay Shaw, founder and CEO of NetDimensions, one of the AIM-listed companies where directors did take a hit. ‘If a company in a recession is looking at possible losses, it is absolutely ridiculous that a CEO would be given increased pay.’

Frank Lewis, chairman of AIM-quoted companies including Asia Ceramics and formerly a member of the AIM Advisory Group, agrees. ‘The outlook for remuneration committees has been very challenging. There are unparalleled changes – regulatory, political to do with bank bonuses – it is important to make sure that they do what is right for the business.’

Directors’ Pay on AIM 2010, a research report compiled by Growth Company Investor, a sister publication to GrowthBusiness, in association with professional services firm Deloitte, provides unique data on the remuneration packages of executives on the London Stock Exchange’s junior market. It found that last year AIM directors’ pay packets took their largest ever blow.

Pay restraint

Just over a third of chief executives (34 per cent) who remained in that role from the previous year received a cut to their basic pay. A further 18 per cent saw basic pay frozen, meaning that less than half of AIM CEOs received a pay rise last year.

Pay cuts are highly unusual on the Main Market, according to Bill Cohen, a partner in the executive remuneration team at Deloitte. The firm’s study of fully listed companies finds that only 5 per cent of CEOs saw a reduction in basic salary last year.

‘It’s quite something if you’re asking your chief executive to take a pay cut – it’s not compulsory, it has to be something they’ve agreed to,’ says Cohen. ‘The fact that it’s happened emphasises the spirit of entrepreneurialism you see within [AIM].’

That said, the median total pay of all CEOs, including bonuses and pension contributions, was £190,300, fractionally higher than the previous year’s £190,000.

Clearly, this is still a cut in real terms, and the latest figure is artificially bolstered by the fact that more than 150 companies left AIM during the intervening year, many of them at the smaller end of the market. All the same, total board pay was still down from a median of £490,042 to £460,670, a cut of 6 per cent. Finance directors were more fortunate, with their median remuneration rising from £133,363 to £139,000.

Hair shirts

There are those who believe that all the fuss about whether directors should take an ascetic approach is missing the point. Among them is David Evans, chairman of several AIM-listed players including fast-growing Immunodiagnostic Systems and Omega Diagnostics.

‘Yes, it is inappropriate for directors to get much of an increase in salary when the rest of the workforce has either had a pay freeze or a minimal increase in salary, but there is a slight worry of getting hair-shirted about it,’ Evans observes. The key issue for remuneration committees, he believes, is retaining executive talent while fostering an ‘entrepreneurial spirit’ in the company, particularly in smaller ventures.

‘If you get too much of a shift towards shareholders’ interests then – certainly in a publicly listed company – you fail to attract the best talent,’ Evans adds. ‘You’re in a competitive labour market. While as part of a remuneration committee I am always looking to align the interests of shareholders and executives, I am less concerned about what shareholders think is best – more concentrating on ensuring the business delivers on the upside. It’s a difficult balance to achieve.’

Steady as she goes

For some, employing a simple, efficient and logical approach to pay means that there are rarely any shocks. René Gawron, chief financial officer of Anglo-German software group SQS, takes a cool-headed view of the situation.

‘Of course, I think it’s quite normal to see pay dropping in a recession,’ he comments, explaining that the company’s long-held policy has been to make 40 per cent of target pay dependent on profits and relative share price performance. The consequence is that directors come to accept the fact that their remuneration is going to be based as much on the company’s performance as on their own personal achievements.

‘When we’ve had years where we did much better than we expected at the start, none of the directors has said, “It wasn’t down to us, it was just a lucky strike, I think I should give some money back.” And when there’s a recession that no-one knew about at the start of the year we also wouldn’t get directors coming and asking for more if their performance-related pay turned out to be lower.’

While the cuts in CEOs’ basic salaries are without precedent on AIM, they don’t tell the whole story. Roughly one in five CEOs receives a bonus, and the median bonus is £73,394, substantially higher than the previous period’s £63,000. Perhaps the big increase is down to what Gawron calls a ‘lucky strike’: trading expectations were set so low that they were, in fact, exceeded in many cases. As a result, while the median increase in basic salary for AIM CEOs was zero, the median increase in total pay was 2.2 per cent.

Too much?

Despite the general trend of frugality towards CEOs and directors, AIM is still littered with examples of what, from an outsider’s perspective, looks like extravagance. For example, more than 200 CEOs took home the equivalent of 5 per cent or more of their company’s turnover, leading to a significant impact on profits. Even in these drastic times, there were 14 directors paid more than £1 million, six of whom were at the helm of loss-making companies.

Jurie Wessels, CEO of Goldstone Resources, who is paid exactly the same as the company’s other executive, says, ‘I think CEOs abuse their position a bit sometimes, as they’ve got a personality – the gift of the gab perhaps too – and the power, and are able to influence people and get a much better deal than they deserve.’

The highest-paid chief executive on AIM was Raymond Chu Wai Man, the Hong Kong-based CEO of biometrics company RCG Holdings. He earned close to £3.8 million last year, compared to £2.2 million previously. He is no longer a member of the company’s remuneration committee, but he was during the year he received £2.2 million.

Profitability premium

Another anomaly in the pay of AIM CEOs is that it has grown so much more quickly among loss-making companies than their profitable counterparts. Over the past three years, CEOs at loss-making concerns have seen their pay rocket from £123,000 to £181,677, while those at profitable ventures have witnessed a much smaller increase, from £174,000 to £200,897. The gap between the two figures is now just under £20,000, the narrowest it has been since 2003.

Does this amount to rewarding failure? Deloitte’s Cohen argues that’s not necessarily the case: ‘I think you need to look under the surface there. You have loss-making companies where the share price is going up considerably.’

Others argue that some anomalies in executive pay on AIM may be a result of failings on the part of remuneration committees. ‘If you’re going to see poor pay governance, you’ll see it in smaller organisations,’ says Simon Patterson, managing director of pay consultants Patterson Associates.

‘Managers there do tend to be less inclined or less disposed to put in remuneration governance programmes, due to cost and time or the perception that they are not needed.’

Looking ahead

Since analysis of directors’ pay is necessarily retrospective, the question remains how much the frigid economic climate has affected pay settlements for the current year, and to what extent it will restrain the largesse of remuneration committees in 2011.

Frank Lewis of Asia Ceramics says those who determine pay levels face some tough decisions: ‘One issue that committees will have to look at this year is setting salaries against a background of rising inflation. If performance is weak, inflation increases will be a big issue.’ Lewis adds that there is likely to be increasing pressure from directors who want to “catch up” after one or two years of pay freezes.

But Cohen at Deloitte says, ‘We are still seeing restraint. We are still seeing a large number of salary freezes. But I would be surprised to see the same level of pay cuts in next year’s report.’

Cohen adds that the expected increase in the level of bonuses on the Main Market is unlikely to be reflected on AIM. ‘Because of the cash challenges for AIM companies I think there will be less of a catch-up on bonuses. I think they’ll still be bumping along the bottom with a slight increase.’

A slight thaw, then, but little change in the general climate.

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