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At Friday’s AGM the non-executive directors did not have a satisfactory answer to my linked questions: “Director remuneration rose from around £1m to £1.7m in a year of very modest basic earnings (£0.1m or 0.13p per share) and with the company having only a market capitalisation £33m. Why such a jump? I’d like to link that question with the observation that if you create two columns of numbers, one with basic earnings per share (the statutory one) and one with “underlying” earnings per share you find that for 2005-7 the numbers are identical, but since then there has been a wide divergence. Could it be that there is some accounting manipulation to ensure bonuses?”
(Previous Newsletters on TClarke: 5th – 11th Nov, 19th Nov, 26th Nov 2015 and 20th – 22nd April 2016)
They were quick to say there was no manipulation. I was aware that they would answer that the bonuses for the executives were justified by the rise in “underlying/adjusted” earnings. This is what the 2015 remuneration report says on the bonuses:
“We believe in rewarding our executives based on their performance and on the value created for our shareholders. The variable elements of executive remuneration are focused on simple and transparent measures of profit before tax, EPS growth and key strategic objectives. Our bonus and long-term incentive structures are based on challenging targets….
………. I am pleased to report that the underlying profit before tax target was indeed met in 2015 and, under the terms of the remuneration policy, a bonus would be payable to directors. However, the Remuneration Committee recognises that the discontinuation of the Bristol and Cardiff operations affected the overall results of the Group. To be equitable to both the executive directors and shareholders, the Remuneration Committee has decided to award the executive directors 50% of the bonus payable.”
If you have a team of directors who for many years cleverly report much higher EPS calculated after adjustments than those that are reported under normal accounting rules, and then you base large bonuses on the “adjusted” earnings then a bad smell is going to be detected.
Fair enough, companies do have years when they have to jettison a bad division here, or incur exceptional expenses there. But to report exceptionals every year, and to then base bonuses on a number that pretends the exceptional loss never happened is to stretch credulity.
Being in the building trade myself I’m aware of the technical phrase for people who push their luck too far in charging for their efforts: We call it “Taking the P*SS”.
Too be fair I’ll present the answers they gave:
1.The board is bigger by one person this year compared with last year. I accept this as a contributory factor to the rise in remuneration.
2.The executives have done a sterling job in closing down the Bristol/Cardiff operations thus saving shareholders money in the future. I asked whether they thought that shareholders had lost a lot of money on the Bristol/Cardiff operations (those discontinued ones). At first, I did not get a straight answer. Eventually they acknowledged that shareholder wealth had been diminished by many millions by the failure in Bristol/Cardiff. So, I said, at the same time as shareholders lost massively the directors are paid a bonus, with the bonus based on ignoring the amount of money they lost for shareholders in Bristol/Cardiff? Yes, that is OK came the reply, because they have now stemmed the losses. I wonder: Who was in charge when the awful decisions were made to build-up the Bristol/Cardiff offices? Isn’t it their job to manage Bristol/Cardiff in the normal course of their duties, and, if necessary, to manage a closing down. For this they receive large salaries – why add bonuses?
3.If we do not pay them well they will go and work for a competitor. Oh, that old one. Any non-executive worth his salt plans for this ultimatum years ahead of time. At the very least you make sure there is a well-defined succession plan, with able and ambitious middle managers waiting to get the chance to prove themselves as executive directors. They can be moved onto the Board should the other executive directors fall under a bus, or try the game of “I’ll move if you don’t pay me more.”
4.They did not receive bonuses in the recession, therefore they should receive something now. Firstly, they are very well rewarded on basic pay – see below. Second, shareholders have not yet seen profits coming their way – in the last two years the company has on average broken-even if you count the discontinued operational losses as real losses to shareholders, which they are.
Unless there is a change in the remuneration policy shareholders will find over the next few years the directors will suck an undue amount from them. Here are the basic salaries and bonus amounts to be taken if they reach targets (we already know about the low level of rigour non-executives enforce):
| £’000s |
Fixed pay |
In line with expectations |
Maximum |
| Mark Lawrence |
340 |
410 |
898 |
| Mike Crowder |
315 |
375 |
791 |
| Martin Walton |
267 |
319 |
682 |
Here is what the executives got in 2015, a year of virtually no increase in shareholder wealth:
|
Shares held |
||
| Mark Lawrence |
£436k |
39,607 |
| Mike Crowder |
£398k |
31,607 |
| Martin Walton |
£338k |
29,607 |
| Danny Robson |
£333k |
n/a |
| Non-executives | ||
| David Henderson (2015) |
£37k |
n/a |
| Iain McCusker (2016) |
£49.5k |
2,000 |
| Beverley Stewart (2016) |
£45.5k |
21,000 |
| Tony Giddings |
£45.5k |
2,000 |
| Mike Robson |
£45.5k |
2,000 |
So they are generous to the NEDs, as well – that would not be linked to the generosity to the executives, would it? You may think so, but I could not possibly comment.
I have been told by the Chairman (after the meeting) that they will re-examine remuneration policy. I do hope they will put the interests of shareholders at the heart of the discussion.
Why have the directors………To read the rest of this article, and more like it, subscribe to my premium newsletter Deep Value Shares – click here http://newsletters.advfn.com/deepvalueshares/subscribe-1
