Directors’ pay: AIM’s rich list

CEOs at AIM's profitable companies received an eight per cent pay rise this year, while loss makers enjoyed a 30 per cent hike. Oliver Haill looks for method in the madness.

The chief executives of the UK’s most high-profile growth companies last year increased their pay by 15 per cent – over three times the current rate of inflation. On average, a chief executive on the Alternative Investment Market (AIM), the London Stock Exchange’s junior market for fast-growing companies, receives £268,036, representing a 54 per cent leap from 2006 and a 100 per cent advance on the £134,000 paid in 2003.

Cashing in

Despite widespread criticism about the bonus structure of City institutions, 24 CEOs of AIM companies were rewarded with more than £1 million. Furthermore, of the 86 CEOs who took home over £500,000, 27 had overseen a loss-making year.

To delve further into the statistics, which were unearthed by our sister publication Growth Company Investor’s Directors’ Pay on AIM 2008 report, the average pay of a chief executive leading a profitable venture was £324,050, up eight per cent from the previous year. Growth in remuneration at those companies losing money was even higher, with the CEO’s average pay up 30 per cent to £223,148.

Frank Lewis, a serial non-executive who has sat on a dozen boards and is a member of the AIM Advisory Group, says, ‘I don’t believe executives who receive huge pay packets for making large losses deserve it. There needs to be a change in attitude so that if you succeed you’re rewarded, but if you fail you’re not.’

Risk and reward

The task for remuneration committees is hardly easy. With small, loss-making companies it is perhaps most difficult to find a balance between rewarding and retaining a good executive and not spending too much of the company’s precious cash.

‘At loss-making companies cash flow is obviously a big problem,’ concedes Lewis. ‘It’s very difficult to set wages, but the culture of rewarding people with bonuses for losses is ridiculous. You should reward people only for positive achievements.

‘People generally think they’re worth more than they’re paid, and also that their bonuses are not enough, but in today’s environment I think they have to wake up and take a different view – although what the answer is I don’t know.’

Millionaires’ club

The increasing adoption of bonuses is one reason why AIM pay is accelerating so rapidly. Each and every one of the best-paid executives had their salary topped up by a bonus and many by additional share-based payments. This has seen AIM executive pay accelerate much faster than that of the UK’s blue-chips.

Recent research by The Guardian and Reward Technology Forum found that boardroom pay among FTSE 100 companies increased by a much slower five per cent to £979.2 million over the past year. Though the gap between AIM and the top tier of the British market is large, the £1.45 million average pay of a chief executive of a FTSE 250 company (although pension contributions were excluded) is surpassed by 11 AIM chief executives.

The AIM company with the costliest remuneration structure is hedge fund manager RAB Capital (the same as last year) which provides a CEO salary of £102,000, swelled by a £7.7 million bonus. The company improved its profits during the year to £51.1 million and the remuneration committee, made up entirely of non-executive directors, decided to distribute 54 per cent of this to the employee bonus pool.

Coming in as the second largest package was the £5.1 million received by the finance director of oil explorer Dominion Petroleum. This was in a year when the pre-revenue company lost $25 million (£16.6 million) before tax and its shares ended up at a similar level to where they started. In this case $8.5 million of share-based payments were added to the $203,000 basic salary.

Abnormal distribution

Even among profitable entities there is a disparity between one company’s idea of a fair reward and another’s. For example, small, growing companies making solid profits of between £1 million and £5 million pay their chief executives an average of around £250,000. But within this band, three companies – a financial services firm, a chemicals company and a gaming company – pay their chief over £1 million.

David Evans, chairman of numerous AIM companies such as Epistem and Omega Diagnostics, says the lack of consistency demonstrates the lengths some ventures have to go to bring on board people who can deliver results. ‘The challenge for small companies is attracting the right quality of personnel. That’s why we’re seeing higher salaries than might seem normal.’

Evans admits that like many others, he has found it necessary to compromise on salary in order to get the right people. ‘At one company where I’m a non-executive, the guy gets a base salary and a bonus. But more than half the bonus is guaranteed.’

He adds, ‘Bonuses are the most divisive thing in companies. ‘Short-term bonuses are a huge bone of contention; people should get paid for doing their job and if they’re not doing their job, then they should not be rewarded.’

Mark Turrell, founder and chief executive of idea management software provider Imaginatik, is an unusual but inspirational case. After a year in which the company’s performance came in behind expectations, this graduate of business schools in London, Paris and Berlin has cut his annual salary this year from £100,000 to £55,000. ‘I took the cut because I wanted to take personal responsibility for results that were not as good as we’d hoped. I felt I did not deserve the money.’

It’s not all about altruism. Turrell is the company’s major shareholder and sees this as his means to reap true rewards. ‘I’m determined to turn this company into a large organisation. I don’t intend for it to remain a micro venture. Also, I wanted as much money as possible to stay in the business.

‘Because I’m an entrepreneur and I started the company with £1 and personally guaranteed the funds pre-IPO, my concept of money is a bit different. I see selling shares as a type of income, so I’d be happy to go to zero salary.

‘From the way I look at it, in a mathematical way, if I’m paid £100,000, after costs and taxes and social security payments, the company spends about £120,000 cash and I only receive around half that. If I sold £100,000 of shares I’d net £82,000 after tax. So to sell down shares is better for me and better for the company.’

Money for nothing?

Keeping control of cash is imperative at loss-making companies, which are much more common on AIM than other markets, yet executives still need to be retained and incentivised. The lowest revenue-generating company in the survey, Broca, for example, made sales of just over £1,000 yet paid its three executives and four non-executives a total of £181,000 for the year, contributing to a £704,201 loss. On the other hand, Bidtimes made £1,000 of revenues, but directors took consultancy fees of £25,000 and the company’s pre-tax loss was £119,276.

Fortunate minority

Since a few highly paid individuals skew the average remuneration package, 71 per cent of CEOs fell below the mean. Further down the scale, 21 per cent of CEOs earned less than £100,000 and eight per cent less than £50,000.

The directors of AIM companies Frame 1 and On-Line were paid nothing for their services during the last year. Technology business builder On-Line, which spun out companies ADVFN and All IPO, is loss-making and has not paid its directors for the last two years, preferring instead to operate a share options scheme.

The least profitable company in the survey is Sportingbet, which paid its chief executive a bonus of £2.6 million to take his full pay to close to £3 million after a year in which the company lost £314 million. However, only £32 million of this loss was from continuing operations, with the majority due to the termination of the group’s US-facing sports and casino business.

Sign of the times

For many companies, the trick will be getting a pragmatic view of fixed pay and incentives, especially with inflation likely to fall. Lewis says: ‘Last year I would have looked at how the company was doing and increased pay in accordance with the cost of living as well as giving them some tough incentives, maybe options; looking for an increase in value of the share price of at least ten per cent.

‘This year, it’s clearly different. Business and cash flow are down, so we’re making the business as efficient as we can and that means maintaining salaries at existing levels. I am sure a lot of incentives and share options are underwater at the moment – and I know institutions don’t like to reprice them. But I think they will have to be repriced.’

It’s not going to be straightforward, especially in sectors where competition is intense to gain the best people. After all, as Evans says, ‘if you hire amateurs to do a job, you are going to get an amateur job’. Then you are condemning your company to failure.

Oli Haill

Oliver Haill

Oliver worked for Vitesse Media, the original publisher of GrowthBusiness, from 2003 to 2010, as a writer, editor, and Head of Research for the editorial team.

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