AIM directors’ pay – Rich pickings

Don't expect consistency when you look at the remuneration packages of chief executives on AIM. This year's figures show a mix of admirable asceticism and outright flamboyance, with the emphasis on the latter. Oliver Haill reports on exclusive research on directors' pay for 2007.

It’s human nature to want to know what another person is being paid. Unfortunately for the executives of publicly listed companies, their salary is there for all to scrutinise. That can lead to some uncomfortable questions if the rewards aren’t proportionate to a company’s results.

Nick Green, joint chief executive of marketing innovator Tangent Communications, believes performance is everything when deciding on remuneration: ‘I’m not a fan of significant basic pay. With loss-making companies, my belief is that if you’re not making a lot of money you don’t want to put the company at a greater loss by paying the management a significant salary.’

The reality is often quite different. Research into directors’ pay on AIM by GrowthBusiness’ sister publication Growth Company Investor, in association with employment specialist Halliwell Consulting, reveals that the less impressive a company’s performance, the higher the remuneration package. In fact, the chief executives of the 50 biggest loss-making companies in the survey earned an average of £294,000 each â“ 23 per cent more than the £240,000 average for AIM as a whole.

The research shows that the difference was even more marked among the boards of this group of companies, which lost varying amounts between £8 million and £52 million. Within these boardrooms, the loss-making companies’ executives pocketed an average of £1,198,080, compared to £832,000 for their more profitable counterparts. That’s a difference of 44 per cent.

There’s a variety of ventures in this category, from young, growing companies, such as online gaming-turned-offline sports betting group Leisure & Gaming, to resources explorers such as Regal, Roc and Highland Gold. Or companies with big plans but no profits yet, such as Mecom, which is building a sizeable pan-European newspaper group, and ATM specialist Cardpoint. The latter two paid their chiefs £469,000 and £329,000 respectively, despite each posting losses of more than £20 million.

Big earners

The highest-paid company in this loss-making group, Asia-focused merchant banker Crosby Capital Partners, has a deferred bonus scheme that paid out large sums based on the previous year’s outstanding performance. Its chief executive was given almost £400,000 in salary, bonus and social security, with an additional £2.3 million from the group’s scheme, of which £1.2 million was again deferred.

Overall, the average salary of an AIM chief executive leapt 38 per cent over 2006 and 75 per cent over 2005 (see chart 1). When compared to the FTSE 100, 25 AIM CEOs take home more than the senior market’s average basic pay of £750,000. Of these, 14 AIM bosses receive in excess of £1 million.

AIM’s finance directors have enjoyed a rise in their compensation too, as they received, on average, £135,000 â“ 23 per cent more than last year’s £110,000 (see chart 4). A total of 266 AIM FDs earned over £100,000, with 79 taking home more than £200,000 and 31 more than £300,000. Conversely, 112 received less than £50,000, with 69 paid less than £30,000.

The research discovers that 123 companies â“ more than double the 59 from last year and far beyond the 47 from the year before â“ pay their board a combined total of at least £1 million. The average pay of AIM boardrooms is now £576,000, 16 per cent higher (see chart 2) than the level shown by our findings in 2006 (£495,000).

The CEOs of the top 100 companies by sales received an average of £600,000 â“ virtually double the £312,000 recorded in 2006 â“ and their board raked in £1.5 million. By contrast, CEOs at the 100 most profitable companies took away £625,000 on average, up from £328,000, with their boards earning £1.4 million.

Of course, when remuneration committees are setting salaries, they must pay due care and attention to numerous influences: objective market data; individual corporate performance; experience and responsibilities; and pay and conditions throughout the organisation.

Remuneration must be high enough to attract and motivate the most suitable managers, but there must be a balance between fixed (salary, benefits and pensions) and variable (bonus and equity schemes) emoluments appropriate to the size, profitability and potential of the company.

For Tangent’s Green, it’s puzzling how often the balance is wrong: ‘We’ve looked at buying companies where their shares have fallen 85 per cent and the company is loss making, but directors’ salaries have not moved down at all. I can’t work that out. I’m a big believer in performance-related pay.’

Fortunately for Green, the company is growing fast and his total pay, including bonus, has doubled in the past year from £62,000 to £124,000. He says: ‘There’s been an increase across the whole management team. In our sales department there are guys who are paid a basic of around £30,000 to £40,000 but take home more than £100,000 over the year. In the early days, before we went public, my brother [joint founder of the company Tim] and I were remunerated at a level we felt was appropriate based on the profitability of the company. We now have a remuneration committee of two non-executive directors, who have helped derive a proper bonus scheme.’

In the past year, the basic salary increase of the Green brothers and their finance director was in line with inflation, but the bonus scheme was triggered when the company met its targets. In addition, Green notes a new long-term incentive plan (LTIP): ‘Our view is that you want to reward executives with a cash payment for the performance of the business but, as we’re also a Plc, it’s important to be focused on the performance of the share price and the options-based LTIP.’

A healthy hand-out
The biggest winner from a bonus scheme this past year was Philip Richards, co-founder of hedge fund group RAB Capital, which proudly stands atop the list of AIM chief executive pay. His standard £102,000 salary had a rather large cherry on top in the form of a £14.3 million bonus.

RAB’s remuneration committee, which includes former Chancellor Lord Lamont, judged that ‘up to 60 per cent of the group’s profit before bonuses and tax was available for distribution’. During the year, the board oversaw a doubling of assets under management to $5.24 billion (£2.53 billion) and a 90 per cent rise in pre-tax profits to £50.3 million.

The CEO of offshore oil industry engineer Lamprell was rewarded with
£3.5 million, around £3 million of which was in share-based payments. This was recompense for a year in which profits climbed 91 per cent to the equivalent of £27.3 million. Close behind in third is investment banking outfit Griffin Group, at which the highest-paid director (who was the sole member of the remuneration committee) took home £87,150 in salary and fees plus £2.8 million of performance-related pay â“ well over four times the pre-tax profit of £613,932 made during the period.

Further down the list of top-paid CEOs
is Andrew Carruthers, boss of venture capitalist Newmedia SPARK, now called Spark Ventures after it acquired rival Quester. His bank balance was strengthened to the tune of £1.4 million after a bountiful year at the company. It entered a sweet spot in the lifecycle of its fund, completing multi-million pound realisations in investments such as Footfall, PriceRunner and, most recently, Mergermarket for a 25-times return of £27.8 million.

Carruthers is keen to stress that he and his colleagues have only recently reached this lofty level after years of toil. The company makes investments for the benefit of shareholders and, when it realises these, the manager of the fund gets rewarded too, so the interests of both parties are aligned. In Spark’s case, it’s 20 per cent of the retained profit.

Following this model meant that, in the first years of the fund’s lifecycle back in 2003, managers weren’t making much at all. ‘I had a very hard time persuading any of my colleagues that our remuneration scheme was going to be worth anything back in 2003,’ he laughs. ‘It represents the cumulative performance of the company and the managers between 2003 and now. So, to give a fair representation of the salaries we’ve received this year, you’d need to amortise the payment over the period since 2003.’

Shareholder interests
As a regular investor who takes board positions in many companies, Carruthers is expertly placed to comment on salaries at early-stage and pre-revenue ventures. In the firm’s advisory role at the companies it invests in, Carruthers and co have the right to veto any executive pay scheme they regard as inappropriate. ‘We have an enormous amount of influence,’ he claims.

The key is to match the interests of executives with shareholders. ‘When we invest in a company, I say: “Look guys, we’re not going to pay you a big salary, especially if you’re still loss-making, so take a low salary and have a big kicker that comes in later.”’

However, this isn’t an issue with many growing companies as the majority shareholder is often the chief executive. Where difficulties can arise, says Carruthers, is when a founder doesn’t have the skills to push a company onwards and a professional CEO, who has managerial skills and knows how to scale a business, has to be brought in. ‘Of course you will get tussles on salary in these circumstances. There may have been a few offers on the table, so your offer needs to be a balance of risk and reward,’ he says.

The link between a company’s remuneration packages and levels of profitability, on AIM at least, are far from consistent. As an index, however, it’s a useful measure to gauge how growing companies are rewarding the top tier, no matter how variable the results may be.

If you want the best people in your company, then you’ll have to pay the market rates, while avoiding eye-catching extravagances that can only be to the detriment of the business as a going concern (especially if you have shareholders).

For Carruthers, common sense has to come into the equation: ‘If we’re hiring a professional manager, then we normally use equity incentives and typically give ten per cent of the company under option. In certain areas, the right person might be harder to find, so their price in terms of salary is higher and you’ll be willing to pay extra to get them.’

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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