UK outsourcer Serco has said it plans to cut its chief executive’s pay by 20 per cent, in the face of growing concern about high pay for the bosses of companies that provide public services.
Rupert Soames, who is steering a recovery of the business after it teetered on the brink of collapse five years ago, earned total remuneration of £2.217m in 2016, according to the last annual report available.
But the board is proposing with Mr Soames’s agreement at the company’s AGM in April to cut his total potential package by a fifth for 2018. In 2014, Mr Soames gave up a £900,000 bonus after the company announced £1.5bn writedowns.
Last month’s failure of Carillion — one of the government’s biggest contractors — has turned the spotlight on whether public sector contractors such as Serco, Carillion, Mitie, G4S and Capita have been incentivised to maximise short-term profits at the expense of long-term viability.
A study by RBC Capital Markets found that outsourcing chief executives earned an average £2.7m in total remuneration in 2016 but their rewards had little correlation with performance.
“We believe that the compensation structure in business services is badly formed and too short-term focused,” the RBC analysts said. “In our view the wrong management incentives can often lead to behaviours that are not in the best interest of shareholders. The absence of a clear link to performance is an obvious concern.”
Carillion collapsed with £5bn in debt and just £29m in the bank, leaving thousands of staff fearing for their jobs and pensioners facing significant losses. Richard Howson, the former chief executive, who was replaced in July and stepped down in the autumn, received £1.5m in salary, bonuses and pension last year.
Nearly all the big outsourcing companies have issued major profit warnings in recent years and one of them, Interserve, is being closely monitored by the government.
The decision to tie executive pay to short-term incentives such as earnings-per-share targets rather than underlying cash flow and returns is important because it encourages management to focus on growth rather than costs, performance, efficiency or innovation. Companies are encouraged to keep seeking contract wins and acquisitions to drive the share price higher, regardless of their sustainability.
G4S, Mitie and Serco were singled out by RBC for paying salaries “which look particularly high” for their size.
Based on the latest annual reports, the average chief executive in the sector earned £800,000 a year in salary, rising to £2.7m when share packages and other benefits are included.
Phil Bentley, chief executive of Mitie, joined the company on November 1 2016 and received £479,000 for his first five months at the company as well as being granted a long-term incentive plan option of up to £879,000 payable in three years, based on performance.
In the year to March 2018, he will receive a base salary of £900,000 and up to £1.44m as a performance-related bonus. He will also receive a pension, benefits and long-term incentive plans that are yet to be disclosed.
Ashley Almanza, chief executive of G4S, received £4.8m in pay and bonuses in 2016, including £2.175m as part of a long-term incentive plan.
Stefan Stern, director of the High Pay Centre, said executive pay was “broken”. “The last thing a business operating in a tight margin environment needs are perverse incentives which deprive a business of necessary investment in the attempt to engineer a short-term rise in the share price,” he said. “We need longer-term incentives that benefit the business as well as executives.”
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