CEO pay: do you get what you pay for?

1 October 2014

The subject of wages of the top executives at listed igaming companies often generates heated discussions, arguments and, at times, highly critical comments. But whether those receiving huge pay packets are worth it (or not) is not for industry observers to say, however, a comparison of chief executive pay deals highlights key differences. 

Scott Longley

Executive pay at listed companies is a perennially touchy subject and examples of what can be viewed as egregious pay awards to top bosses can bring out the egalitarian instincts in even the most hard-edged capitalist. 

No company would wish to see the tag ‘reward for failure’ appended by the press to any given results statement.

Given these sensitivities, it is perhaps no coincidence the detail of pay awards for the top brass at listed entities is - if not hidden away - then at least buried within the small print of the remuneration report section of annual reports.

The latest listed gambling entity to feel the wrath of the corporate governance oversight lobby has been Betfair.

In early September, shareholder watchdog ISS Proxy Advisory Services complained that the betting exchange had significantly moved the goalposts with regard to bonus awards related to its Long-Term Incentive Plan (LTIP) set out in 2011.

Specifically, ISS pointed out Betfair had trimmed its target rise in earnings per share (EPS) – a key measure for performance-related awards for any listed company - by 29%.

This meant that ex-financial director Stephen Morana saw 48.3% of his LTIP award vest, compared to none if the original EPS target had stood. ISS said the move was “contrary to standard UK market practice” and that it had been undertaken “without compelling justification”.

Top wage vs. average salary
The company was, understandably, quick to respond. It pointed out that the LTIP set out in 2011 was based upon overly-optimistic assumptions; namely that more European markets would open up favourably for the company than has to date been the case.

Betfair pointed to four specific unforeseen regulatory situations that were harmful for the company’s growth prospects; turnover tax being introduced on exchange betting in Germany; the legal situation for online gaming deteriorating in Greece; new regulations in Spain in 2012 that again were negative for Betfair; and delays in Italy over the regulation of exchange betting.

Backward-looking actions with regard to targets are far from common at listed companies, according to Andrew Ninian, director of corporate governance and engagement at the Investment Management Association (IMA). “Generally investors don’t like retrospective changes,” he says. “They are rare.”

Betfair was keen to highlight the complaints of shareholders at Betfair were about a three-year-old incentive scheme, and that the remuneration policy with regard to the current management attracted the overwhelming support of close on 100% of shareholder votes at the AGM in early September.

Betfair also pointed to further vocal support for its current incentive and remuneration policy from two other corporate governance bodies.

Pensions and Investment Research Consultants (PIRC) said the variable element of the chief executive Breon Corcoran’s remuneration was less than 200% of salary, “which is considered acceptable”.

Meanwhile the Association of British Insurers (ABI), which also fulfills a role in corporate governance oversight, pointed out that Corcoran’s salary increase of 3% for 2014 was in line with the pay rises across the company.

Indeed, looked at in the context of Betfair’s listed peer group, when Corcoran’s total remuneration package is compared with the average annual salary at Betfair, his 2013 pay is far from excessive.

On a crude calculation, Corcoran’s 2013 total of £1.28m equates to being 24.4 times the average annual salary at Betfair of £52,287.

This looks generous enough – until you see that the-now-departed Ralph Topping at William Hill and the-very-much-still-there Richard Glynn at Ladbrokes received total pay packages of £4.97m and £4.72m respectively – or 257 and 252 times the average respective salaries at their companies of £19,363 and £18,715.

There are contributory factors here that explain some of the differential. Both William Hill and Ladbrokes employ shop staff whose annual wages hover around the national minimum wage level in the UK.

But even if we calculated each of their 2013 totals according to the UK average wage of £26,500, they still received awards which were 188 times average wage for Topping and 178 times average wage for Glynn.

The chief executive who comes out best from this measure is Patrick Kennedy at Paddy Power, whose €1.44m total pay for 2013 is 34 times the national average wage in Ireland of €41,238.

EBIT levels and trading performance
But the total pay versus any average measure is only half the story; it should also be understood in the context of the overall trading performance. 

When we compare total pay packages against each company’s earnings before interest and tax (EBIT), we get a simplified measurement of the correlation between pay and profits.

Here Topping and Glynn diverge dramatically. While William Hill’s 2013 EBIT figure of £303m would have to be divided by 61 times to get to Topping’s total pay award, the same ratio for Glynn when set against Ladbrokes’ 2013 EBIT of £92.6m is a mere 19.6.

Notably, though, both suffer in comparison with five years previously. Then the pay award for Topping’s younger self represented a ratio of 189, while Glynn’s predecessor Chris Bell’s pay award of £837,000 would have to be multiplied 262 times to reach Ladbrokes’ 2009 EBIT of £219.2m.

It should be added that Glynn’s 2013 pay award did attract press criticism at the time.

Nearly £4m of the total of £4.7m was due to a payout on the Ladbrokes Growth Plan (LGP) instigated when Glynn joined the company in 2010 and designed to incentivise 140 of the company’s executives for their combined efforts in revitalising the company under Glynn’s stewardship.

Laudable enough aims perhaps; but the mechanics of the award have left the company open to criticism.

The first payout for the LGP was achieved in the first quarter of 2013 when the share price stayed above the target price of 220p for 30 consecutive days, thus triggering a payout of 40.7% of the maximum amount of shares due for the executives involved in the scheme.

Since that trigger, however, the share price has performed poorly and as of the end of September it was hovering around the 130p level.

Pay awards based on a straight share price performance tend not to be welcomed by investors as such measures will not take into account wider market moves where a share price might be riding on the coattails of a market-wide bull run.

As it is, Ladbrokes acknowledged the unfortunate timing of the LGP award.

In its 2013 annual report it recognised the fall in the share price since the time of the award and said executives had “voluntarily not sold any shares they have been exposed to the decrease in share price in the same way as all other shareholders”.

All of which might come as scant comfort all round should the share price struggle to regain levels above 220p.