It would be logical to assume that Britain's highest paid directors were those in the best performing companies, as measured by earnings per share. But this is not necessarily so, as a recent P-E International survey reveals. By Helen Kay.
Productivity seems to end at the door of the British boardroom, according to a new analysis of boardroom pay carried out by the P-E International management consultancy.
The analysis (not to be confused with P-E's own annual salary survey) of the published accounts of the top 250 quoted companies shows that boardroom pay bears little relation to the growth in a company's earnings per share (EPS), normally regarded as the best yardstick for rewarding company executives. "Many people talk about using EPS as the best measure of boardroom performance, but it does not seem to be getting applied in practice. Perhaps it is not the best measure," says Dennis Henry, P-E's resident number cruncher.
Certainly the median figures for all of the companies in Henry's database confirm this observation. While earnings per share grew by a little over 52% over the latest three-year period, the pay of the highest paid director grew by 70% and total boardroom remuneration by nearly 63%.
In retailing, one of the go-go sectors of the 1980s, the difference was even more marked. While earnings per share grew by 31%, the median figure for the salary growth of the highest paid director was 90%, though total boardroom pay grew by a more "modest" 63%. In the unfashionable engineering sector the differences were far less marked: EPS grew by 52%, and the earnings of the highest paid director grew by 65%.
Looking at the best and worst performers, Henry's analysis shows that some of the great stars of the 1980s have come a cropper of late. At Next, the creation of George Davies until he was unceremoniously booted out, the highest paid director now enjoys a £404,000 salary, up 42% in the past three years, even though earnings per share have tumbled 183%. If he was paid strictly in line with EPS performance that director would actually be paying Next some £235,000 for the privilege of working for the high street fashion chain.
Similarly, Storehouse, Sir Terence Conran's creation, has seen its earnings per share fall by 77% in three years, though the highest paid director's salary has risen by 159%. If that particular director was paid strictly in line with his EPS results he would be collecting the princely sum of £23,000.
At the Bradford-based Empire Stores things also look bad. Earnings per share have slumped by 98% over the past three years. If the highest paid director of the troubled mail order firm had taken a commensurate drop in pay, he would now be earning only £1,222 a year. Instead his salary has more than doubled, giving him an enviable 12,000% increase in pay relative to company performance.
It is not all bad news for company shareholders, though. Howden Group, the Glasgow-based engineering company which built the boring machines for the Channel tunnel, has seen its earnings per share grow by 766% in the past three years. The highest paid director, who now earns £188,000, has shown admirable restraint in being awarded a mere 12% increase in three years, which is well below the overall rate of inflation. If his salary moved in line with company performance he would be earning £1.4 million (Howden's remuneration committee please note). This would actually make him one of the highest paid directors in the country, right up with that doyen of British industry, Lord Hanson.
Of course Howden's recovery looks all the more impressive as it came from a very low base. Three years ago a large wind-powered electricity generation project went awry when the blades provided by a subcontractor failed. This caused Howden a very considerable expense.
Those with a stake in Gestetner should also feel pretty happy. The photocopying business has proved almost as lucrative as would making one's own bank notes. But despite EPS up by 365%, the highest paid director gets a rise of only 23%.
Overall there seems to be little real correlation between performance and pay, which suggests in Henry's view that another, better way of rewarding managers for their achievements is urgently needed. It should be one that really does penalise poor performance, as well as rewarding the best.
Director's pay relative to company performance
Three-year Highest paid Three-year What HPD should
% growth in director % growth should earn if
earnings per (HPD) salary in HPD related to EPS
share (EPS) (£000) salary change (£000)
Next -183 404 43 -235
Davies and Newman -151 61 11 -28
Sketchley -113 218 176 -10
Empire Stores -98 149 157 12
Storehouse -77 258 159 23
Howden Group 766 188 12 1,454
Conder 465 109 154 404
Renold 460 106 121 269
Plaxton 383 189 350 203
Gestetner 365 101 23 382
Source: P-E International.