UK: Management Today/William M Mercer Total Shareholder Returns League Table.

UK: Management Today/William M Mercer Total Shareholder Returns League Table. - £100 invested three years ago in Jarvis shares would have grown by £1,700. The same sum invested in Telewest would only be worth £50. The second Management Today/William M Me

by Sarah Perrin.
Last Updated: 31 Aug 2010

£100 invested three years ago in Jarvis shares would have grown by £1,700. The same sum invested in Telewest would only be worth £50. The second Management Today/William M Mercer Total Shareholder Returns League Table reveals some interesting winners and losers.

How should you measure a company's performance? Finding a reliable method isn't only a matter of concern for investors. It is also increasingly important to the UK's top managers. Increasingly Total Shareholder Return (TSR) is being recognised as a key measure of company and management performance.

The measure is a component in at least 70% of the long-term incentive plans of the FTSE-100 companies. Growing numbers of managers are therefore finding their final pay packets swelling or shrinking in line with their company's return to shareholders rather than its financial performance per se.

For the second year running, the Management Today/William M Mercer ranking of TSR for the FTSE-350 reveals the leaders and laggards in the performance field. The main table shows that Jarvis, the facilities management, construction and property group, is a clear winner with a near 1,700% return over the three-year period 1995 through to 1997. This return is more than double the still-impressive return of the company in second place, British Borneo.

TSR ranks companies according to the growth (or decline) in the combined measure of share-price performance and dividend payments. In effect, it shows the theoretical capital growth that would have been achieved by a shareholder, in this case over a three-year period, assuming all dividends were re-invested.

Many smaller companies are also starting to use the TSR measure, encouraged by the enthusiasm of fund managers for the indicator.

This year's table shows that many UK companies can be pleased with themselves.

Investing in the FTSE-350 gives a better rate of return than stashing cash in a building society or a risk-free gilt. Average TSR for the period 1995 to 1997 was 44%, equivalent to 13% a year, with 163 companies achieving or bettering this performance. 'It's reassuring to see the number of well-managed companies,' says Cliff Weight, a principal in the Executive Compensation Practice at William M Mercer. Even so, that 44% average masks a huge range of performance, from the 1,697% rise in TSR achieved by Jarvis down to the far-less-impressive result for Telewest Communications in last place. Anyone who invested £1 there three years ago would now be left with a stake worth just 50p.

Although TSR is used as a measure of how much value companies are delivering to shareholders and hence management performance, its movements are not due to management ability alone. A company's share price, for example, is essentially driven by three key factors. Firstly, the general sentiment about the strength of the economy as reflected in the stock market. Secondly, issues affecting particular industry sectors; last but not least, management performance. In effect, two out of three determinants of performance are largely out of management's control. 'For some companies at the bottom of the table, it's not necessarily due to the fact that the management is doing poorly, but that the sector is having a difficult time,' says Weight. As a result, the best way to see how well individual management teams have done is to compare like-with-like and look at a company's TSR against the average for its peers in that sector. If retail groups achieved an average TSR increase of 77%, for example, then it is fair to say that any company's increase above that level represents a strong management effort.

A glance at the top of the table reveals the industry sectors that are currently enjoying the high life. Oil, IT, banking, insurance and retail companies all spatter the list of the top 50. The oil industry, for example, claims both the second and third spots through British Borneo and Cairn Energy, while IT specialists such as JBA, Sage, Sema, Misys and Logica all make it into the top 20. 'A lot of work is coming through because of the dreaded millennium problem,' says Weight. The IT cluster illustrates the general rule that, as particular industry sectors come into favour, so all companies in that area tend to benefit. Pharmaceuticals companies such as British Biotech, SmithKline Beecham and Zeneca also rank highly. 'Pharmaceuticals companies have done well for a number of years because of the growing demand for healthcare and for drugs,' says Weight. The industry has also been going through a period of consolidation, highlighting the potential for adding value through mergers and acquisitions.

Similar dynamism in the insurance industry, with growing demand for insurance products and mergers and acquisitions activity creating influential groups such as Royal & Sun Alliance, has helped keep companies in the sector among the leaders. Particularly worthy of note is the high ranking (15) of Independent Insurance, a relative newcomer to the publicly quoted sector.

Looking at the top performers, it is clear that small, more volatile companies do well in these rankings. The seventeenfold increase in shareholder returns achieved by Jarvis is remarkable.

The management's efforts to transform the business deserve to be thoroughly applauded. The acquisition during 1996 of Jarvis Facilities (formerly NIMCo) shifted the group's focus from being primarily a construction business towards becoming a provider of services, principally relating to the railway and construction industries. Jarvis Facilities, for example, generated around 50% of its 1997 income from maintenance contracts with Railtrack.

Though it is clearly easier to achieve a high percentage increase on a small starting value, small companies don't have the top 50 places completely to themselves. Large banks such as Standard Chartered and HSBC have done well.

One potential weakness in rankings of TSR is that the start date can have a significant impact on the result. Three years is relatively short period of time in the life of some of the UK's most-established companies. Hanson, which sits at number 308 this year, slightly down from 301 in 1996, could argue that over a 30-year span it would appear near or at the top of any TSR table. However, a three-year measurement period seems sensible, given that most companies use that time span in their long-term incentive plans.

Three years should also be sufficient to smooth out the impact of artificial share price rises, which may be the result of stock market rumours.

The risk of distorted results can also be reduced by comparing sets of results, which also highlights fast-improving companies and sectors. Fast risers that have improved their ranking by over 100 places include oil companies Enterprise (up 162 places), Premier (up 158) and Lasmo (up 113).

Those losing most ground include Lonrho (slipping 189 places), Rank Group (down 166) and British Steel (down 167).

Achieving accurate TSR comparisons is increasingly important for UK managers who could lose out on significant long-term benefits if their performance is judged below par. As Weight points out, it is not uncommon for chief executives or directors on Long-Term Incentive Plans (LTIPs) to receive awards of shares equal to 75% of annual salary. The value of that LTIP ultimately depends on two factors: the number of shares actually received, and the value of those shares as determined by TSR growth.

William M Mercer's study shows that for a company performing in the upper quartile in both survey periods a 75% of salary award would now be worth 278% of salary if dividends were re-invested. However, an executive in a company sitting at exactly the median company in both survey periods would have an LTIP worth only 55% of salary. In other words, a chief executive in a top quartile company earning £300,000 a year could be enjoying LTIP shares worth £834,000, while his rival in a median performer would have an LTIP worth £165,000.

Managers confident that their company can achieve above-average TSR returns can only gain by using the performance measure to determine their LTIP awards. Those that lie clustered around the median could find that even a small downward fall in TSR pushes them out of contention for any long-term benefits at all.

While this may well trouble corporate executives, it won't bother institutional investors who are increasingly keen to align their interests with an appropriate performance-related pay methodology.

TSR, it seems, aren't going to go away.

The FTSE-350 top companies ranked according to their total shareholder

returns over the three-year period 1995-1997

1 Jarvis 1697%

2 British Borneo 784%

3 Cairn Energy 642%

4 JJB Sports 537%

5 JBA Holdings 496%

6 Sage Group 493%

7 PizzaExpress 476%

8 Manchester United 431%

9 British Biotech 341%

10 Capita Group 322%

11 Admiral 314%

12 Stagecoach 284%

13 Select Appointments 266%

14 J D Wetherspoon 264%

15 Independent Insurance 261%

16 Sema Group 240%

17 Standard Chartered 226%

18 London Clubs International 216%

19 Misys 215%

20 Logica 214%

21 British Aerospace 214%

22 Bodycote International 210%

23 Dixons 204%

24 Next 203%

25 Mayflower Corporation 197%

26 CRT Group 187%

27 HSBC Holdings 183%

28 SmithKline Beecham 178%

29 Provident Financial 171%

30 Serco Group 168%

31 Legal & General 166%

32 Zeneca 158%

33 Cobham 155%

34 Perpetual 153%

35 Barclays 152%

36 Cattles 150%

37 London Forfaiting Company 148%

38 Ashtead 145%

39 Arcadia 143%

40 Airtours 143%

41 Asda 143%

42 Powerscreen 140%

43 WPP 134%

44 Aegis 134%

45 Carpetright 127%

46 DFS 126%

47 Bank of Scotland 124%

48 Amvescap 122%

49 Hays 121%

50 Britannic Assurance 121%

51 Abbey National 121%

52 Glaxo Wellcome 120%

53 Chelsfield 119%

54 BP 115%

55 Prudential 115%

56 Hardy Oil & Gas 113%

57 Compass 112%

58 Emap 111%

59 Ocean 111%

60 Burford 108%

61 Close Brothers 107%

62 Schroders 106%

63 BSkyB 106%

64 Argos 106%

65 GKN 104%

66 Rentokil Initial 103%

67 Associated British Foods 100%

68 Peel Holdings 99%

69 Siebe 95%

70 Tesco 92%

71 National Express 90%

72 BBA 90%

73 Shell Transport & Trading 88%

74 Lasmo 87%

75 Electrocomponents 87%

76 NatWest 87%

77 Smiths Industries 86%

78 N Brown 86%

79 Danka Business Systems 83%

80 Kwik-Fit 83%

81 Britax International 81%

82 Yorkshire Water 79%

83 Nycomed Amersham 78%

84 Southern Electric 78%

85 TBI 77%

86 United Assurance 77%

87 General Accident 76%

88 3i 75%

89 Premier Oil 75%

90 Enterprise Oil 75%

91 Medeva 74%

92 Royal & Sun Alliance 74%

93 Travis Perkins 73%

94 Berkeley 72%

95 Granada 71%

96 Severn Trent 71%

97 London International 71%

98 Thames Water 71%

99 Vodafone 70%

100 Pillar Property 70%

101 Guardian Royal Exchange 70%

102 British Airways 69%

103 Spirax-Sarco 69%

104 Bass 68%

105 Bellway 67%

106 Unilever 67%

107 Boots 65%

108 South West Water 63%

109 Reckitt & Colman 63%

110 Scottish Media 62%

111 Fleming American 61%

112 Arriva 61%

113 Royal Bank of Scotland 60%

114 Whitbread 60%

115 Anglian Water 60%

116 Electra Investment Trust 58%

117 Daily Mail 'A' 58%

118 Fairey Group 58%

119 Polypipe 58%

120 Flextech 58%

121 Commercial Union 58%

122 Safeway 57%

123 Unigate 57%

124 Ladbroke 57%

125 Christies International 56%

126 Investors Capital Growth 56%

127 British Land 56%

128 BOC 56%

129 TI Group 55%

130 Greene King 54%

131 Wessex Water 54%

132 Devro 54%

133 National Power 54%

134 Edinburgh US Tracker Trust 53%

135 United Utilities 53%

136 St Ives 53%

137 TT Group 53%

138 City of London Investment Trust 52%

139 Reed International 52%

140 Carlton Communications 51%

141 Mercury Eur. Privatisation Trust 51%

142 EMI 51%

143 Limit 51%

144 Land Securities 50%

145 RIT Capital Partners 50%

146 Redrow 49%

147 Inspec 48%

148 Kingfisher 48%

149 Hyder 48%

150 Scottish & Newcastle 47%

151 Capital Radio 46%

152 Liberty International 45%

153 Scottish Investment Trust 45%

154 Savoy Hotel 'A' 45%

155 Johnston Press 44%

156 Morgan Crucible 44%

157 London & Manchester 44%

158 Scottish Mortgage 44%

159 Bunzl 44%

160 Barratt Developments 44%

161 Powergen 44%

162 Reuters 43%

163 Bradford Property Trust 43%

164 British Assets Growth 43%

165 M&G Group (Holdings) 42%

166 Second Alliance 42%

167 Scottish Eastern 42%

168 Govett Strategic 41%

169 Wm Morrison 41%

170 Mirror Group 41%

172 Marks & Spencer 41%

172 Murray International 41%

173 United News & Media 40%

174 Slough Estates 40%

175 GEC 40%

176 Alliance Trust 40%

177 Blue Circle Industries 40%

178 Witan Investment 40%

179 Rolls-Royce 40%

180 Hammerson 38%

181 Tomkins 38%

182 Securities Trust of Scotland 38%

183 BAT Industries 37%

184 Taylor Woodrow 36%

185 BT 36%

186 Burmah Castrol 36%

187 Stakis 36%

188 Beazer 35%

189 Edinburgh Investment Trust 35%

190 Vickers 35%

191 ED&F Man 35%

192 Anglo & Overseas 35%

193 Fleming Mercantile 34%

194 Trinity International Holdings 34%

195 Cadbury Schweppes 33%

196 Monks Investment Trust 32%

197 Smith & Nephew 32%

198 Bankers Investment Trust 31%

199 Davis Service Group 31%

200 Wilson Bowden 30%

201 Murray Income 29%

202 Hewden-Stuart 29%

203 Scottish Hydro-Electric 28%

204 Pearson 28%

205 Monument Oil & Gas 28%

206 SIG 27%

207 Cable & Wireless 27%

208 Great Universal Stores 27%

209 Senior Engineering 27%

210 Great Portland Estates 26%

211 IMI 26%

212 British Assets 26%

213 Wolseley 26%

214 Diageo 25%

215 Northern Ireland Electricity 25%

216 Scottish Power 25%

217 BG 25%

218 Aggregate Industries 24%

219 Fleming Overseas 24%

220 Wassall 24%

221 MEPC 23%

222 Foreign & Colonial 23%

223 Bowthorpe 22%

224 British Steel 22%

225 Scottish American 22%

226 Rio Tinto 21%

227 Henderson Smaller Companies 20%

228 Wolverhampton & Dudley 19%

229 ICI 19%

230 Laird Group 19%

231 Hillsdown Holdings 18%

232 Northern Foods 18%

233 Greenalls 17%

234 FKI 17%

235 BAA 17%

236 Charter 17%

237 Storehouse 16%

238 BPB 16%

239 Tate & Lyle 16%

240 Vaux Group 16%

241 First Leisure 15%

242 Caledonia Investments 15%

243 McKechnie 15%

244 Brixton Estate 14%

245 P&O 14%

246 Templeton Emerging Markets 14%

247 Racal Electronics 13%

248 RMC 12%

249 Hazlewood Foods 10%

250 Associated British Ports 10%

251 J Sainsbury 10%

252 Pentland Group 10%

253 Johnson Matthey 9%

254 BTP 8%

255 Scapa Group 8%

256 Halma 7%

257 Alliance Unichem 7%

258 Allied Colloids 6%

259 Rank Group 5%

260 MFI 5%

261 Williams 5%

262 Persimmon 4%

263 LucasVarity 4%

264 Mersey Docks 4%

265 Lex Service 2%

266 Meyer International 2%

267 Premier Farnell 2%

268 Cookson 1%

269 Signet 0%

270 House of Fraser 0%

271 Croda International 0%

272 David S Smith -2%

273 Laporte -2%

274 Bryant Group -4%

275 Lonrho -5%

276 British Vita -5%

277 WH Smith -6%

278 Kalon Group -6%

279 Weir Group -8%

280 Rugby Group -9%

281 Booker -9%

282 Allied Domecq -10%

283 Wilson (Connolly) -10%

284 Willis Corroon -12%

285 T & N -13%

286 Powell Duffryn -15%

287 George Wimpey -15%

288 Tarmac -16%

289 Sedgwick Group -16%

290 Highland Distilleries -16%

291 Glynwed -17%

292 Hambros -17%

293 Marley -17%

294 Pilkington -18%

295 Body Shop -19%

296 Elementis -19%

297 Govett Oriental -20%

298 Dalgety -21%

299 NFC -21%

300 Caradon -24%

301 Hepworth -24%

302 Courtaulds -25%

303 Rexam -26%

304 United Biscuits -26%

305 BTR -27%

306 Arjo Wiggins Appleton -28%

307 Delta -28%

308 Hanson -30%

309 English China Clays -32%

310 Sears -33%

311 Coats Viyella -37%

312 Kwik Save -39%

313 Inchcape -39%

314 BICC -41%

315 De La Rue -45%

316 Telewest Communications -50%

TOP 20 CLIMBERS COMPANY

RANK '97 RANK '96 CHANGE

TBI 85 317 +232

London International 97 300 +203

Enterprise Oil 90 252 +162

Premier Oil 89 247 +158

General Accident 87 227 +140

Nycomed Amersham 83 207 +124

Thames Water 98 222 +124

Commercial Union 121 245 +124

Kingfisher 148 270 +122

Royal & Sun Alliance 92 212 +120

Unilever 106 225 +119

Safeway 122 240 +118

Reckitt & Colman 109 226 +117

Lasmo 74 189 +115

Christies International 125 235 +110

Devro 132 242 +110

Ladbroke 124 232 +108

Chelsfield 53 159 +106

Severn Trent 96 191 +95

BT 185 280 +95

TOP 20 FALLERS COMPANY

RANK '97 RANK '96 CHANGE

David S Smith 272 70 -202

Lonrho 275 86 -189

Pilkington 294 122 -172

Premier Farnell 267 97 -170

British Steel 224 57 -167

Rank Group 259 93 -166

Capital Radio 151 16 -135

Caledonia Investments 242 107 -135

Stakis 187 53 -134

Vickers 190 56 -134

RMC 248 125 -123

Storehouse 237 117 -120

Cookson 268 148 -120

Laird Group 230 112 -118

Greenalls 233 115 -118

Reuters 162 51 -111

Govett Oriental 297 186 -111

Flextech 120 11 -109

Racal Electronics 247 140 -107

BPB 238 132 -106

CALCULATING TSR

A THREE-YEAR MEASURE

Total Shareholder Returns (share price plus dividends) is the theoretical capital growth that would have been achieved by a shareholder over a three-year period, assuming all dividends were re-invested. There are several different ways of calculating TSR; this methodology compares the average share price for the year preceding the three-year period with that for the final year.

The calculations are fully adjusted for rights issues and other changes in share capital.

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