Greed and the City

The salaries of AIM CEOs continue to climb ever higher, despite the outcry over bankers' salaries and the City culture of rewarding boards for failure. GrowthBusiness unveils unique research into directors' pay on AIM.

Bankers may be nonplussed by the public opprobrium at their financial excesses, but the bottom line is that nobody should be rewarded for failure.

Mark Adorian, head of the remuneration committee of AIM-listed StatPro, is unimpressed by businesses that perpetuate a culture of avarice, especially at publicly listed entities. ‘It’s a terrible situation that companies making losses are paying huge amounts to their directors,’ he says, adding that it’s not only the executives who should be admonished. ‘It reflects sadly on the inactivity of shareholders in this country.’

As many companies freeze or reduce salaries, others persist in defying recessionary gravity. Paul Fineman, CEO of International Greetings, a manufacturer of wrapping paper and greetings cards, states, ‘It’s a different world, and I can’t relate to such a culture. And if I nail my colours to the mast, I can’t respect it either.’

Own goals

Adorian compares it to the fantasy world of footballers. ‘At smaller companies and those that are not doing as well, I feel that setting salaries is a bit like the situation with Premiership football teams, where the 80 per cent who are doing less well feel justified in paying what the top companies are paying.’

Indeed, while some shell-shocked investors may have wished for company directors to share some of the financial pain of the past year, the chief executives of the UK’s most high-profile growth companies actually enjoyed a 5 per cent hike in their pay. The average pay package of a chief executive on the Alternative Investment Market (AIM) is now £190,000, which represents a 30 per cent increase over the past three years.

Directors’ Pay on AIM 2009, compiled by our sister publication, Growth Company Investor, in association with professional services firm Deloitte, provides unique data on the remuneration packages of executives on the London Stock Exchange’s junior market. Significantly, it shows that almost 16 per cent of AIM companies poured over £1 million into their boards’ pockets during a period when the total market capitalisation of AIM fell from a peak of £99 billion to £39 billion.

Admittedly, AIM executives don’t claim to be doing “God’s work” and many are now having to work harder for their money. There were some areas of pay where restraint was shown, most notably in the percentage of AIM chiefs taking home the largest amounts. In fact, the percentage of those being paid more than £500,000 fell from 9.6 per cent to 6.9 per cent, while the share of those earning over £1 million fell from 2.7 per cent to just 0.6 per cent. Still, the overall trend shows pay packets getting heavier, not lighter.

Setting the bar

When remuneration committees are calibrating pay packages, they must take account of numerous influences, from objective market data to individual corporate performance, experience and responsibilities. At smaller companies, which are all about potential, this task becomes even harder.

Given the economic climate, some shareholders have been calling for a freeze on salaries and will certainly expect the level of bonuses paid to reflect performance. This means there is a need to apply even greater judgement than usual when setting a balance between fixed and variable elements of remuneration, making it possible to motivate and attract suitable managers while remaining appropriate to the size, profitability and potential of the company.

‘It’s a different culture and I can’t relate to it’

‘Newer companies that come to AIM to raise cash need to preserve money with a lower basic salary, and without regular cash flow they need to include a higher level of performance-related pay,’ points out Nigel Rogers of electronic manufacturing services provider Stadium, whose management took a 20 per cent pay cut from April to July this year (their salaried staff also agreed to a 10 per cent reduction). Rogers believes the tough times of late may cause a rethink of how salaries are set at smaller companies. ‘I think we will see an increasingly high proportion of performance-related pay from here on at the expense of basic salaries. I think salaries might be held back a bit and you’ll see more of that in the future.’

The cost of failure

Nevertheless, there is a significant difference in pay between directors at profitable and loss-making companies. The average CEO pay at loss-making companies is £171,835, while those at profitable companies is 26 per cent higher at £216,013. The chief executives of loss-making companies saw their pay increase 14 per cent, while that of CEOs of profitable companies remained flat on last year.

StatPro’s Adorian, himself a proven entrepreneur as well as a director of a host of early-stage ventures, is troubled by the number of companies making losses which are paying huge amounts to their directors. ‘At another company where I am a director there is, as at any such company, a strong-willed CEO saying that he should have a large bonus at the year-end even though the company has had a tough year and lost money. I said, “No, the shareholders are suffering and many will be sitting in a negative equity situation. Your bonus should be tied only to your ability to generate profits.”’

Sheryl Tye, FD at International Greetings, says, ‘We have a share option scheme to reward directors, but this was under water last year after the share price dropped under different management. We introduced a new bonus scheme for the top 50 to 60 managers, but we have to produce a profit first and then beat our target in order to get the bonus.’

Other boards clearly have different approaches to remuneration. The wind turbine manufacturer Clipper Windpower  posted losses of $313 million (£170 million) for year-end 2008. Despite having only two executive directors on its board and seven non-executives, Clipper paid out total emoluments of $3 million, and almost $1 million of this was in bonuses. Likewise, mining and exploration concern Mwana Africa lost £228 million but paid its chief executive officer £448,000, including not insubstantial bonuses, after completing a fundraising and two acquisitions.

Horses for courses

As profitability eludes many early-stage AIM companies, it can sometimes be more appropriate to set pay against alternative benchmarks. Although Stadium is profitable, Rogers explains that his board’s remuneration committee does just that. ‘We use benchmarks against which to fix pay for the executive board members, so that it is aligned to other companies of a similar size.’

The research shows that chief executives of AIM companies capitalised at below £4 million received a median take-home package of £123,000. This is not far off half the pay packets of chief execs of companies 50 times their size, as companies valued at £200 million and above pay their CEO a median £303,783 a year.

James Geddes, finance director at the profitable and fast-growing online market researcher Brainjuicer, says, ‘We’re a small company and it is a challenge as you do need good people if you want to grow fast. We try to make sure our pay is fair, but it’s probably slightly below average. We attract staff as we’re growing fast; we’re a bit quirky and we make sure everyone is looked after. As far as I know, our pay is comparable with other companies in our sector, based on our size.’

The well runs dry

The research into directors’ pay on AIM shows that those taking home truly vast sums has dipped over the past year, perhaps through a combination of tougher targets and the emerging awareness that the good times were coming to an end. In last year’s report, 24 executives took home more than £1 million of their company’s cash, of which seven received over £2 million. This year, only four CEOs received more than £1 million, with a single director being rewarded with more than £2 million.

Of the 100 best-paid directors in the research, the average pay package for a CEO was £525,234. The component of basic pay within this was around £300,168. On average, these companies turned over £149 million and their average market capitalisation was £106 million.

‘Of the 100 best paid CEOs, the average package was £525,234’

The highest pay package in this year’s study was the £2.2 million (HK$31.97 million) in salary, bonus and pension contribution paid to the senior executive of Hong-Kong based biometrics and radio frequency products specialist RCG Holdings. This pay package represents 1.6 per cent of both the company’s turnover and its market capitalisation, which are both just over £140 million. The company has delivered for shareholders, generating profit growth of 35 per cent to HK$613 million and issuing investors with a tripled dividend of 1.5p per share.

The second and third highest-paid directors are at online gaming company Sportingbet and global engineering group Kentz, which respectively paid their chief executives £1.57 million and £1.45 million. Total pay for the top 100 best-paid executives is on average 1.7 per cent of their company’s average market valuation over 2008, although of course the value of most companies diminished significantly during the year.

Remuneration strategies at public companies are always going to come under scrutiny. While Directors’ Pay on AIM 2009 shows that some of the excesses of years gone by may have dissipated somewhat during the past 12 months, there still appears to be an attitude in many of AIM’s boardrooms that potential is what gets rewarded, rather than solid performance. If the same approach continues into 2010, shareholders may finally start to ask some tough questions.

Bill Cohen, a partner in the executive remuneration consulting team at Deloitte, reflects on the findings of Directors’ Pay on AIM.

The fact that the remuneration of directors played some role in the downfall of the banks, sparking the current economic situation, has thrown executive remuneration more generally into sharp relief, not only for shareholders, but in the wider public arena.

AIM companies tend not to be subject to quite the same degree of scrutiny as companies listed on the main market. As there is currently no requirement to disclose the remuneration of individuals, the trends are not as readily apparent as they are in companies listed on the main market. But it is clear that the current environment is affecting AIM companies.

While overall pay has clearly continued to rise in AIM companies, the rate of growth has slowed significantly. Of course, this research looks at how pay moved in the most recent financial period, and there is little information about the pay increases currently being awarded. However, Deloitte research covering FTSE SmallCap companies indicates that around 80 per cent of companies will not award a salary increase to directors in the 2009/10 period, and it seems likely that many AIM companies will follow suit.

Another striking finding from this research is that the overall level of bonuses paid to all CEOs in AIM companies has decreased from over £36 million last year to just over £23 million this year. While the median bonus payment has increased, these numbers indicate that those paying higher bonuses are paying less this year, and we expect this trend to continue.

For the majority of AIM companies, share options are the favoured method of providing long-term focus and alignment with shareholders. Many of these options will now be underwater and companies may want to look at ways of managing the motivational issues this creates.

While the primary aim of the remuneration strategy should be to support the business plan, aspects such as retention, motivation and taxation will all require careful consideration over the next 12 months. We hope this research will help companies in their deliberations.

See also: AIM directors’ pay – Rich pickings

Nick Britton

Nick Britton

Nick was the Managing Editor for when it was owned by Vitesse Media, before moving on to become Head of Investment Group and Editor at What Investment and thence to Head of Intermediary...

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