It all very much depends’ is entrepreneur John French’s response to the question of how much you should pay the executives running a public company on AIM. French’s reticence isn’t down to lack of experience (he sits as chairman or non-executive director on four AIM companies) but down to the wide variety of companies on the market.
‘AIM is a very diverse arena, with over a thousand companies. What you pay the individuals at the top is tied to many different factors. When I am hiring a CEO or a chief operating officer my deliberations are coloured by the size and scale of the business, its position relative to the sector, the length of time it has been operating, and whether it is profitable or not,’ he says, adding that ‘when salaries are up for reassessment, I look at what the management has achieved, the goals that have been met and the number of objectives reached. It’s all about attitude and performance – but there are no hard and fast rules.’
What the market pays
However, while it’s true that there are no strict rules, there are some very useful benchmarks, most obviously the second annual survey of AIM executive salaries carried out by our sister publication Growth Company Investor. This unique and comprehensive research document, compiled in collaboration with Ernst & Young, investigated 630 companies to reveal that the average CEO on AIM is paid a very useful £144,900 – 0.96 per cent less than last year.
The average total remuneration of AIM boards is £378,000, a drop of 0.84 per cent against 2003 levels. The restraint shown by AIM executives contrasts sharply with the total earnings of FTSE 350 executives, whose pay rose an inflation-busting 16.1 per cent (Income Data Services 2004). Moreover, AIM CEOs earned just 12.2 per cent of the pay of FTSE 100 chief executives (£1.19 million on average) in a year when the AIM Index easily outperformed the FTSE 100 Index, rising 15.3 per cent, against the Footsie’s 10.8 per cent increase.
Executives at the top
Best paid of all AIM CEOs is Philip Richards, co-founder of fund management outfit RAB Capital.
Both Richards and another principal director received £2.5 million – more than twice the next highest paid – from a venture which has thrived from investing in the burgeoning resources sector. RAB’s last set of full year results showed profits soaring no less than 279 per cent to £10.76 million.
Two other companies of note are investment bank Numis and the Personal Group, both of which appeared in last year’s top five. The CEOs here earned £884,000 and £753,000 respectively. Pipping both to the number two spot though, was animal pharmaceutical company Lawrence. It paid its chief executive Michael Brent a not insignificant £1.08 million, a 633 per cent increase during a year when the company’s profits improved 18 per cent to £5.4 million.
Bonuses are nice little earners
RAB, which only joined AIM in March this year, also has the highest paid board. Collectively, its team of executives cost shareholders £6.7 million, more than three times the next highest paid, and a figure that represented 28.9 per cent of turnover. In stark contrast to this, second-placed Terrace Hill paid its entire board £1.5 million (or 3.8 per cent of turnover), an outlay not far above InTechnology’s spend (£1.5 million, or 0.7 per cent of turnover), Ramco Energy’s (£1.4 million or 6.7 per cent of turnover) or the £1.3 million paid out by retail groups Monsoon and International Greetings.
Interestingly, performance-related bonuses made up significant portions of the money spent by such companies, an indication of how important it is for AIM CEOs to hit their trading targets and impress the cynical and unforgiving City community. Michael Brent’s salary at Lawrence contained a bonus worth £976,000. Oliver Hemsley, chief executive of Numis, received a bonus worth £700,000 of his final pay. Most would argue they were worth the money.
As Giles Capon, director of performance and reward at Ernst & Young outlines, ‘for shareholders, the overriding emphasis is to ensure that executives are not being paid for failure. Establish an appropriate mix of fixed and variable pay and long-term incentive plans.’
Option plans are superior
Aside from bonuses though, the other important (perhaps more important) mechanism for incentivising management teams at AIM’s leading companies are share option plans.
David Lyne, chief executive of fast-growing travel promotions business Landround, argues that ‘the ability to include share option plans in the executive remuneration package is a great tool. The reality is that we have to perform for shareholders; that means improving profits and earnings for those that own the company. Only if you have delivered will your options be worth anything. Therefore, for me, well-structured option plans ensure all interests are perfectly aligned.’
AIM’s lowest-paid servants
At the other end of the spectrum are a brace of resource companies, Capricorn Resources and African Gold, which respectively employ the lowest-paid chief executive, at £13,500, and board, at £10,000. Luckily for shareholders, these two enjoyed a huge surge in their market capitalisation during the year. Capricorn’s worth increased 81 per cent to £1.7 million and African Gold witnessed a 478 per cent increase in its market cap to £13.52 million.
By and large, most of the companies in the lowest-paid categories are fledgling, speculative companies that have yet to record substantial growth, of which London Asia Capital, (just outside of the top ten for lowest-paid boards) is a prime example. Since chief executive Simon Littlewood transformed the business into an investor in companies in the Greater China region in late 2002, the company has been very frugal in paying its staff.
‘We didn’t take a salary in our first year, as any money we had we ploughed back into the business,’ says Littlewood. ‘After we completed a fundraising in 2003, we allowed ourselves a small salary, but it was still very low.
‘We underpay all our staff,’ he adds. ‘We really operate like a merchant bank, so directors and staff will be paid low salaries and bonuses will only come out of profits earned, preventing overheads from building up.’
Littlewood does, however, make use of options and it’s worth noting that if share options are important for AIM’s larger, more profitable companies, they are even more crucial for its fledgling, struggling outfits.
According to Rodger Sargeant, an entrepreneur behind successful AIM businesses, ‘at smaller companies, cash is all important. You must look after what you have. I prefer to be a little over-generous when offering share options in order to conserve cash. Every penny counts at the early stage.’
This frugal and practical approach is one employed by Russell Stevens, chief executive of investment company Bidtimes. ‘It is laudable that a fair proportion of AIM companies in the start-up and pre-revenue stage are paying their executives very low wages. Directors shouldn’t be extracting wealth in ventures that either don’t have huge cash resources or aren’t generating much in the way of revenues. Rewards must mirror achievements.’
The biggest earners and the largest losers
Of the most cash-generative companies on AIM, Monsoon is far and away the most profitable, producing £44 million at the pre-tax level. But interestingly, of the top ten highest-paying boards, only itself and RAB Capital make an appearance as high profit producers.
Perhaps even more curious is that six of the least profitable companies pay their boards over £400,000. First Artist, the football-weighted sports management concern, which produced pre-tax losses of £15 million compared to pre-tax profits of £642,000 a year earlier, is a prime example of this.
Finance directors must do more than count
Among the AIM directors in our survey, only finance directors enjoyed an increase in their salary, albeit a small 3.65 per cent hike to hoist the average wage to £85,200.
A finance director of a quoted company must possess a raft of different skills that complement the entrepreneurial and creative élan of the person in the chief executive chair. Getting the balance of skills and the salary right – for this and other senior positions – is never easy. Says Landround’s David Lyne: ‘in building an executive team, all AIM companies need to keep an eye on the market rates when setting salaries for their most important directors – after all, we need to attract the best players.’ For Lyne, the finance director should be the perfect foil for the chief executive; a voice of reason and clarity in an environment where ambition is often out of kilter with reality.
‘Finance directors are crucial. You need a reliable number two. Prior to Claire Dyer joining us, we had a competent, professional bookkeeper who fulfilled the function. But we reached the stage where we really needed a skilled person. Claire’s presence has proved invaluable. She has real market knowledge.’
Need to know — Directors’ pay at a glance:
- Average AIM CEO pay: £144,900
- Average FTSE 100 CEO pay: £1.19 million
- Average AIM board pay increase: 0.84 per cent
- Average FTSE 350 board pay increase: 16.1 per cent
- No. of AIM company boards paid over £1m: 26
- No. of AIM CEOs paid over £250,000: 63
- No. of AIM CEOs paid over £500,000: 5