UK: Who's delivered the goods?

UK: Who's delivered the goods? - The first Management Today/William M Mercer Total Shareholder Returns ranking reflects the rise of TSR as a measure of both corporate and management performance.

by Fiona Jebb.
Last Updated: 31 Aug 2010

The first Management Today/William M Mercer Total Shareholder Returns ranking reflects the rise of TSR as a measure of both corporate and management performance.

How do you measure a company's performance? Not easily is the eternal answer. But the best guide to current thinking is to look at where the sticks and carrots are supposed to be driving the top management of Britain's quoted companies - and that is towards doing better than their peer group in terms of Total Shareholder Return (TSR). The Management Today/ William M Mercer TSR table gives the ranking of the FTSE-350 measured by the growth (or decline) in the combined package of share price performance and dividend payments. Performance against this type of measure is now used as the basis for calculating the major component of directors' bonuses in over half of FTSE-100 companies.

The route to this method of assigning top managers' bonuses has been winding, with nudges along the way from bodies such as the Greenbury Committee.

Share options, introduced in the early 1980s, fell into increasing disrepute as it became apparent that the likely payments to a company's directors were influenced more by the general direction of the stock market than by the directors' individual brilliance or incompetence. Attempts were made to base option schemes on pure financial performance, primarily based on absolute growth in earnings per share (eps), but these in turn have increasingly fallen foul of the strong link between overall economic conditions and earnings.

And the disrepute into which eps as a measure of anything other than managers' ability to manipulate figures has done nothing to help.

By contrast, TSR reflects the measures of success closest to the hearts of a company's investors: what they have actually gained or lost from investing in one set of executives rather than in another. Fund managers aim to outperform their own competitors in terms of overall investment return; financial incentives for company managers based on whether they are doing better (and how much better) for their investors than their peers mean that their bonus is directly related to the extent to which they satisfy the aims of their investors. What could be better than that?

The TSR table also irons out one of the most misleading elements for those trying to assess relative performance. Too often judgment is passed on a company by looking at its share price performance relative to its peers'. This is to ignore the level of dividend that a company has paid.

On average about 30% of all returns to investors over a three-year period are in the form of dividends (assuming they are reinvested). Taking dividends into account can often significantly affect the perceived performance of individual companies: consider high-yielding Hillsdown Hold-ings which finds itself 44 places higher in the ranking based on TSR for the period 1994-1996 compared to its ranking based on share price alone. Many of the utilities would find themselves in a similar boat (see table, p52).

For non-or low-yielding companies such as Premier Oil or Templeton Emerging Markets, the reverse holds true.

All this goes to explain why TSR has become the performance measure of first choice for so many remuneration committees. Unsurprisingly, the external pay experts are similarly enthusiastic, given the demand among such pay committees to fine-tune the exact metrics against which their executives are to be measured, and the consequent need for regular reports on ongoing performance. There is an especially booming business in advising on the group against which a company's performance should be measured; myriad arguments can be made for any individual company to be compared against something other than a catch-all FTSE index.

Arguments for special pleading frequently highlight the advantages which certain types of company have in doing better than the median (which is usually the point at which TSR-related bonus schemes start to pay out).

Typically those perceived to have an advantage are volatile stocks or companies hit by catastrophe, both of which are likely to over-or under-perform dramatically. The disasters which befell WPP, Next and British Aerospace in the early '90s and their subsequent recovery has resulted in a performance in the top decile in the Management Today/ William M Mercer table. Indeed WPP's Martin Sorrell has already had a bite at this particular cherry: his share-price performance-related scheme - under the terms of which he personally had to make a substantial investment - was put in place when WPP was still in recovery mode; it has already started to pay out very handsomely. The steadier performers feel they lack the opportunity to shine in such company. 'Some firms will only ever have a share price that will tick along,' sums up Brian Symcox in the senior executive compensation practice at Mercer. 'How can you compare them to exploratory oil or gold companies?' This is aggravated by a tendency, in the FTSE-100 especially, for many companies to be closely bunched around the median - meaning that comparatively slight differences in performance can be disproportionately important. The company that comes in 40th, bringing a bonus to its managers, may have provided pretty much the same rewards to shareholders as one returned in 51st place, where there is no pay-out to managers. Perhaps the response to such arguments is that the executives in charge of trundling but trusty giants shouldn't be in the market for substantial performance bonuses.

Nevertheless, enthusiasm in the FTSE-100 for adopting TSR-based performance bonus schemes remains high. Most are also choosing to set the measurement period for TSR performance at three years. It's hardly a long time span, but, given that beneficiaries are usually required to hold the shares which constitute their reward for at least a further two years after they receive them, the consensus appears to be that motivated managers need to believe their financial rewards will come early into the new millennium. The argument also runs that for those being recruited externally, particularly into a business which is struggling, a longer timescale may significantly reduce the attractiveness of the new position.

Some of the nation's giants, such as Boots, have been marginally more long-termist with performance measurement periods of four years. Despite this conservative stance, Boots has found its scheme under scrutiny for another of its features: doubts have been expressed about its choice of only 10 other firms to constitute its peer group - and this including struggling Sears as one of the chosen few. With limited experience of how these schemes might turn out, City eyebrows seem to start twitching at any variation from the norm, although they appear to suffer less when outside experts have been brought in to provide external validation.

However the bonus schemes turn out, TSR must always be the ultimate guide to the commercial success of any investment. Those who invested in Psion three years ago can feel smug and rich, although they are unlikely to feel as comfortable as David Potter who, as its largest shareholder as well as chairman and chief executive, must have had limited need for a TSR-based incentive plan. Eurotunnel shareholders can berate themselves for buying the worst-performing share of the period, but may console themselves by comparing their loss with those who bought £1 of Sycamore Holdings shares in 1966; the value of that investment today, including reinvested dividends, is 2p.

FTSE-350 RANKED ACCORDING TO TOTAL SHAREHOLDER RETURNS OVER THE THREE

YEARS 1994-1996

1 Psion 838%

2 Yorkshire Tyne Tees 608%

3 British Biotech 492%

4 Cairn Energy 440%

5 Manchester United 392%

6 British Borneo 370%

7 Perpetual 369%

8 Sage 363%

9 Pizza Express 348%

10 Henlys 292%

11 Flextech 276%

12 Stagecoach 268%

13 Wetherspoon (JD) 264%

14 Standard Chartered 236%

15 Next 234%

16 Capital Radio 233%

17 Burford 217%

18 Danka Business Systems 207%

19 Carpetright 204%

20 Logica 195%

21 British Aerospace 194%

22 Serco 184%

23 Provident Financial 180%

24 WPP 172%

25 Mayflower 158%

26 Cobham 155%

27 GKN 149%

28 Sema 142%

29 RJB Mining 141%

30 National Express 139%

31 Celltech 139%

32 Dixons 138%

33 Zeneca 132%

34 Spirax-Sarco 132%

35 Cattles 132%

36 Argos 132%

37 Compass 131%

38 CRT 128%

39 Scotia 122%

40 BBA 122%

41 British Petroleum 121%

42 Bodycote International 121%

43 Molins 121%

44 Smiths Industries 117%

45 EMI 116%

46 Burton 115%

47 Aegis 115%

48 Eurotherm 114%

49 Close Brothers 113%

50 Emap 113%

51 Reuters 112%

52 Fairey 111%

53 Stakis 111%

54 Granada 110%

55 Travis Perkins 109%

56 Vickers 108%

57 British Steel 108%

58 Schroders 104%

59 Mercury Asset Management 103%

60 Asda 103%

61 Hays 101%

62 Royal Bank of Scotland 100%

63 Rentokil Initial 99%

64 Electrocomponents 99%

65 Barratt Developments 98%

66 Brown (N) 98%

67 Barclays 98%

68 Vitec 97%

69 Siebe 96%

70 Smith (David) 96%

71 Invesco 96%

72 Ashley (Laura) 95%

73 Dorling Kindersley 94%

74 TT Group 90%

75 Cowie 90%

76 Bunzl 90%

77 Britannic Assurance 88%

78 HSBC 88%

79 DFS 88%

80 Lloyds Chemists 88%

81 British Airways 88%

82 Bank of Scotland 87%

83 SmithKline Beecham 87%

84 Schroders 86%

85 Legal & General 84%

86 Lonrho 84%

87 Rolls-Royce 83%

88 Associated British Foods 83%

89 Vendome 82%

90 Southern Electric 82%

91 Misys 82%

92 TI Group 79%

93 Rank 79%

94 Reed International 77%

95 Bass 77%

96 Savoy Hotel 77%

97 Premier Farnell 76%

98 Hewden-Stuart 76%

99 Ocean 76%

100 Low & Bonar 76%

101 Electra Investment Trust 76%

102 Kwik-Fit 75%

103 RIT Capital Partners 74%

104 Airtours 74%

105 London Electricity 73%

106 Bellway 73%

107 Caledonia Investments 73%

108 Shell Transport and Trading 73%

109 Abbey National 72%

110 British Polythene 71%

111 Scottish & Newcastle 70%

112 Laird 70%

113 ML Laboratories 69%

114 Peel 69%

115 Greenalls 68%

116 Carlton Communications 68%

117 Storehouse 67%

118 Glaxo Wellcome 67%

119 Vodafone 66%

120 Pearson 66%

121 Whitbread 66%

122 Pilkington 66%

123 Blue Circle Industries 65%

124 Burmah Castrol 65%

125 RMC 64%

126 United Assurance 64%

127 Daily Mail 62%

128 Great Universal Stores 62%

129 Clyde Petroleum 61%

130 Morgan Crucible 61%

131 Scottish TV 61%

132 BPB Industries 61%

133 Medeva 60%

134 St Ives 60%

135 Powerscreen 59%

136 Brake Brothers 59%

137 RTZ 59%

138 Berkeley 59%

139 Wolseley 59%

140 Racal Electronics 58%

141 Prudential 58%

142 M & G 58%

143 National Westminster Bank 58%

144 Tesco 57%

145 Mirror Group 56%

146 Taylor Woodrow 55%

147 PowerGen 55%

148 Cookson 54%

149 Guardian Royal Exchange 54%

150 BOC 53%

151 East Midlands Electricity 53%

152 Polypipe 52%

153 Smith & Nephew 52%

154 Murray International 51%

155 Yule Catto 51%

156 Northern Ireland Electricity 51%

157 ICI 50%

158 Charter 50%

159 Chelsfield 50%

160 Johnston Press 49%

161 British Land 49%

162 Bowthorpe 49%

163 IMI 49%

164 Hillsdown 48%

165 MFI Furniture 48%

166 National Power 48%

167 Bankers Investment Trust 48%

168 Witan 47%

169 Yorkshire Electricity 47%

170 Liberty International 46%

171 Yorkshire Water 46%

172 Second Alliance 46%

173 Scottish Eastern 46%

174 Anglo & Overseas Trust 46%

175 F & C Pacific 46%

176 Scottish Investment Trust 46%

177 FKI 45%

178 Unigate 45%

179 United News & Media 45%

180 South West Water 45%

181 Trinity International 45%

182 Associated British Ports 45%

183 Alliance Trust 44%

184 Scottish Mortgage 44%

185 Govett Strategic 44%

186 Govett Oriental 44%

187 Hyder 44%

188 Boots 43%

189 Lasmo 43%

190 United Utilities 43%

191 Severn Trent 43%

192 Marks & Spencer 43%

193 Monks Investment Trust 42%

194 Johnson Matthey 41%

195 Foreign & Colonial 40%

196 McKechnie 40%

197 Tate & Lyle 40%

198 London & Manchester 40%

199 Fleming Overseas 39%

200 BTP 37%

201 TR Smaller Companies 37%

202 TR City of London 37%

203 Anglian Water 36%

204 Vaux 36%

205 Glynwed 36%

206 Halma 36%

207 Amersham International 36%

208 Edinburgh Investment Trust 36%

209 Templeton Emerging Markets 36%

210 Greene King 36%

211 BAA 34%

212 Royal & Sun Alliance 34%

213 GEC 34%

214 Monument Oil & Gas 33%

215 Wolverhampton & Dudley 33%

216 Bradford Property Trust 33%

217 Scottish American 33%

218 Wassall 33%

219 Murray Income 33%

220 Fleming Mercantile 33%

221 Mersey Docks 32%

222 Thames Water 32%

223 Wessex Water 31%

224 Hammerson 30%

225 Unilever 30%

226 Reckitt & Colman 29%

227 General Accident 29%

228 Land Securities 29%

229 Croda International 29%

230 Cadbury Schweppes 29%

231 BAT Industries 28%

232 Ladbroke 27%

233 First Leisure 27%

234 Tomkins 27%

235 Christies International 27%

236 London Insurance Markets 26%

237 Highland Distilleries 26%

238 Laporte 26%

239 Slough Estates 25%

240 Safeway 25%

241 Allied Colloids 25%

242 Devro 24%

243 Cable & Wireless 24%

244 Williams 24%

245 Commercial Union 24%

246 Scapa 24%

247 Premier Oil 23%

248 Calor 23%

249 Meyer International 23%

250 Booker 22%

251 Menzies (John) 22%

252 Enterprise Oil 22%

253 Fleming Japanese 22%

254 Grand Metropolitian 21%

255 Chubb Security 21%

256 Great Portland Estates 21%

257 Morrison (Wm) 21%

258 Senior Engineering 20%

259 UniChem 19%

260 Smith WH 19%

261 MEPC 18%

262 Lex Service 18%

263 Fleming Far Eastern 16%

264 Scottish Power 16%

265 Wilson Bowden 16%

266 P & O 16%

267 British Assets 15%

268 Guinness 14%

269 Pentland 11%

270 Kingfisher 11%

271 Bryant 9%

272 Marley 9%

273 Brixton Estate 9%

274 Arjo Wiggins Appleton 9%

275 De La Rue 7%

276 Scottish Hydro-Electric 5%

277 Sears 5%

278 British Vita 4%

279 Wilson (Connolly) 4%

280 British Telecommunications 4%

281 Dalgety 4%

282 Allied Domecq 2%

283 Harrisons & Crosfield 2%

284 Wimpey (George) 2%

285 Redland 1%

286 Persimmon 1%

287 Powell Duffryn 1%

288 Tarmac 1%

289 T & N 1%

290 BICC 0%

291 Body Shop International -1%

292 Mercury World Mining Trust -1%

293 Kalon -3%

294 Hepworth -4%

295 Courtaulds -5%

296 Rugby -5%

297 Delta -6%

298 BTR -6%

299 Albert Fisher -7%

300 London International -7%

301 Hanson -8%

302 Sedgwick -9%

303 Sainsbury (j) -9%

304 Salvesen (Christian) -9%

305 Rexam -9%

306 Northern Foods -9%

307 Weir -10%

308 English China Clays -10%

309 Coats Viyella -13%

310 British Gas -13%

311 Caradon -13%

312 Cordiant -14%

313 Willis Corroon -15%

314 NFC -15%

315 Hambros -18%

316 United Biscuits -26%

317 TBI -28%

318 Kwik Save -30%

319 Inchcape -40%

320 Eurotunnel -77%

TSR ranking includes companies in the FTSE-100 and FTSE Mid 250 as at 31

December 1996.

Only 320 companies are ranked, as 30 companies included in the indices at

the end of the period in question were structured significantly

differently at the beginning of the period or did not have a publicly

quoted share price for part of the three years.

Source: William M Mercer

COMPANIES POSITIVELY AFFECTED BY MEASURING TSR VERSUS SHARE PRICE GROWTH

Share TSR Improved

price growth growth ranking**

Hillsdown 18% 48% +44

South West Water 16% 45% +36

East Midlands Electricity 28% 53% +33

Unigate 17% 45% +33

Anglian Water 11% 36% +32

London Electricity 42% 73% +32

Yorkshire Water 20% 46% +30

ICI 27% 50% +29

London and Manchester 14% 40% +29

Northern ireland Electricity 28% 51% +29

**Ranking based on TSR compared to ranking based on share price

performance

TOP TSR PERFORMERS 1966-1995

TSR over 30 years

Hanson 98132%

Racal Electronic 79161%

Savoy Hotel 62485%

BTR 52070%

Securicor 49624%

Glaxo Wellcome 46230%

Dixons 43953%

Jefferson Smurfit 40937%

News International 40093%

Photo-Me International 38897%

METHODOLOGY

Three-year calculations

Total Shareholder Return (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; most crucial to this methodology is that the starting and closing share prices are based on the average share price during the preceding year.The calculations are fully adjusted for rights issues and other changes in share capital.

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