Mark Bentley questioned Premier's

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18th May '12 by Isaac

17 comments 7452 reads

At Premier Oil's shareholder meeting, 9pc of investors voted against its remuneration report after ShareSoc, which represents private investors in the UK, backed a no vote.

Mark Bentley, a director of ShareSoc, questioned Premier's "incredible" level of pay awards at the shareholder meeting.

"I am concerned to observe that total pay for the five executive directors in 2011 was an extraordinary £13.2m, with the chief executive receiving a package worth 183 times the median UK salary," Mr Bentley said.

"Considering that the share price fell in 2011 and that average production came in below guidance, please could you explain how such incredible rewards are justified?" he added.

Premier shares fell almost 30pc last year.

Earlier this week, investors in Cairn Energy sent the clearest message yet to a major company's board, with 67pc of shareholders voting against the group's remuneration report.

Last year, Sir Bill Gammell, Cairn's chairman, was granted a controversial £1.4m "loss of office" payout after he stepped down as chief executive.

More than 10pc of shareholders also voted against Sir Bill's re-election as chairman of the oil explorer.

http://www.telegraph.co.uk/finance/newsbysector/supportservices/9275980/Michael-Page-and-Premier-Oil-targeted-on-director-pay.html

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Isaac

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17 comments

emptyend

19th May '12

Yup - I saw that comment too.

What I'd be interested in, though, is the answer he obtained! I hope Mark will pop up to tell us.

I've said it before and I'll say it again - there isn't much that company execs can do about the share price itself......so it really shouldn't form part of such questions. It isn't the fault of management that the markets have gone risk-off, thanks to matters that are completely and utterly outside their control. Those of us who are shareholders have only got ourselves to blame for having failed to take sufficient account of such externalities in the global economy.

Failure to hit operational targets, however, is usually going to be a completely different matter - though there will sometimes be extenuating circumstances such as the failure of third parties to perform.

The basic principle is that if management are continually set, and meet or beat, stretching targets then the share price will eventually take care of itself. Therefore remuneration should be structured to encourage them to do precisely that - and shareholders shouldn't complain too much when payments are made when operational targets are met or beaten, because that is what management is employed to do.

marben100

20th May '12

Hi ee,

Details of the Premier Oil (LON:PMO) AGM are contained in my report on the ShareSoc member's network, here: http://sharesoc.ning.com/xn/detail/6389471:Comment:16799

Here's what I said about the answer:

The chairman, MW, was happy to hand this question to rem. com. chairperson Jane Hinckley (JH) to respond, having given the usual guff about the need to remain competitive with international salaries. That appears to me to be a self-serving argument, which leads to an inexorable ratcheting up of executive salaries relative to those of employees not part of the executive clique, as we have seen ovcer the last 30 years . It appeared to me that JH struggled to find an appropriate response and appeared to be embarrassed. She also indicated that there had been a significant vote against the remuneration report last year (as a recent shareholder – though a longstanding one in EnCore, which Premier took over - I was not aware of this) and that she was holding ongoing discussions with shareholders on this matter. Checking later, I found that last year’s proxy votes are here: http://www.premier-oil.com/premieroil/assets/lib/documents/AGM2011_ProxyResults.pdf and that 28.7% of votes cast were against the remuneration report, with a large number of votes withheld. Had the withheld votes been voted against, those against would have been 41.5%.

Concerning your comment:

I've said it before and I'll say it again - there isn't much that company execs can do about the share price itself...

Yes, I agree that the SP isn't too relevant, which makes it all the more unfortunate that, if you actually plough your way through Premier's 20 page remuneration report (twice the length of Shell's, as pointed out by another shareholder), you find that a large part of the LTIP awards, which forms the greater element of 2011 total remuneration is based on share price performance..

I find these complex LTIP schemes totally iniquitous.They are hard for shareholders to understand and often lead to utterly disproportionate awards for executives. In Premier's case (and many others), these guys are already being paid handsome salaries. Why do they need bonuses that are multiples of those salaries, when they do their jobs well? What other employeees get that sort of salary arrangement? I simply don't buy the argument that these guys are somehow "irreplaceable" and have to receive "internationally competitive" pay. Particularly in Premier's case, where I haven't seen anything exceptional achieved. I'd be much more sympathetic to Stuard at Aminex receiving a reward if he delivers on his plan*, as I understand it - but even in that case, he'd already be well rewarded through the options he's got, so not sure he needs further incentives (which is why I asked about that at the AGM, and was pleased with the response).

Sorry that I felt a need express my disgust in rather simplistic terms by relating it to the SP performance. Unfortunately, though sophisticated arguments don't work too well with the press and public! Missing the production target is the far more important criterion upon which to judge Premier's success, and certainly makes this a "reward for failure" in my eyes.

I wouldn't quibble (too much) at a £1m package for Premier's CEO, considering the scale of the company and the complexity of his job, but £4m is just way OTT and helps drive the general ratcheting up we've seen,

*That's because his plan is original and strikes me as eminently sensible. I can also see that it won't be at all easy to execute and will need a lot of personal effort and skill from Stuard (as well as other members of Aminex's team) to execute. That's very different from Premier's case, which I see as largely delivering on "business as usual".

Cheers,

Mark

emptyend

20th May '12

Thanks for posting re the response Mark.

On a related matter, you say:

if you actually plough your way through Premier's 20 page remuneration report (twice the length of Shell's, as pointed out by another shareholder), you find that a large part of the LTIP awards, which forms the greater element of 2011 total remuneration is based on share price performance..

I find these complex LTIP schemes totally iniquitous.They are hard for shareholders to understand and often lead to utterly disproportionate awards for executives.....

Sorry that I felt a need express my disgust in rather simplistic terms by relating it to the SP performance. Unfortunately, though sophisticated arguments don't work too well with the press and public! Missing the production target is the far more important criterion upon which to judge Premier's success, and certainly makes this a "reward for failure" in my eyes.

I have highlighted a REALLY crucial point!!

It merely adds to the wrong, misleading, damaging and utterly counter-productive propaganda line peddled by the media to gloss over some really crucial distinctions in the various elements of pay. And I also think that LTIP schemes shouldn't all be lumped together as somehow "iniquitous". It is crucial to look at the details!

Now, I'm not going to argue about the Premier scheme specifically, as I haven't read the details. But I have read the details of sector peer SOCO International (LON:SIA) 's - and the explanatory commentary about remunerations structures and policy - and would commend those to anyone who is interested in the rationale for why FTSE350 companies structure their remuneration in the way that they do. You can find the commentary on pages 59-63 of the annual report here. In SOCO's case, their LTIP awards:

a) lapse in the event that the total shareholder return doesn't achieve the median TSR for the named peer group of companies

b) are scaled so that only 25% of the award vests for a TSR that matches the median, but rising to 100% of the award vesting if the TSR exceeds the 84th percentile

In other words, management only does very well (in terms of the LTIPs) if the shareholders have done very well over a rolling 5-year period - and management get nothing at all unless they have done a better job for shareholders than the median of the comparator group. I highlight the point about the LTIPs, because these long-term, multi-year incentives are distinctly different from annual bonuses.

I suspect that in fact most of the opprobrium about pay should be reserved for the payment of unjustified bonuses, rather than LTIPs. Bonuses should relate to the achievement of any exceptional achievements during the year under review. So, for example, delivering projects ahead of time or under budget might be bonusable events - as might achievements that exceeded reasonable expectations in other areas. Bonuses are ...or should be...an incentive for managment to outperform every year. LTIPs are a reward that incentivises management to focus on delivering long-term returns for shareholders. Both of them have their place in compensation packages for the guys who are running the company, but unjustified discretionary bonuses are more open to manipulation IMO than LTIPs.

It is crucially important for responsible commentators to focus on the exact areas which are purportedly damaging to shareholders' interests, rathert than merely abstractly railing against high pay for company CEOs. The latter merely plays into the hands of the anti-business lobbyists who are pursuing their own political agenda in the press by systematically "bashing business" and making the UK a less attractive business environment in which to invest.

If shareholders fail to criticise responsibly then they are quite likely to end up damaging the very companies whose interests they claim to be trying to defend. You are right, Mark, to say that "sophisticated arguments don't work too well with the press and public" - but that doesn't mean that one should sacrifice accuracy and honesty in exchange for expediency in getting one's message across (not that I'm implying that you were, of course - but one needs to be aware that plenty of people in the "pay debate" are not disinterested parties and may have vastly different agendas from your own).

marben100

20th May '12

But, especialy in Soco's case, why is it necessary to have complex schemes? The executries already have large stakes in the company? Why the need to "incentivise" them further? Are they likely to walk away from the company if not so incentivised?

As I said to Isaac earlier, I'm not going to be overly critical on Soco's scheme, as it's far from being the worst example.

Why is it that executives require complex schemes that require pages and pages to explain, when other employees don't?

Whether the details of Premier's scheme are right or wrong, the awards that have resulted are outrageous.

I'm sorry, but IMHO these LTIP schemes been dreamt up by "remuneration consultants", at the behest of the Board. They are overly complex and appear to be a good way of bamboozling shareholders,including institutions, (which is why, up to now, they have acquiesced). Until recently, when the spotlight has been shone on them, the institutions had little motivation to look too hard at these schemes. If you hold 100 investments, do you have time to study 100 10 page schemes on each in fine detail? The rewards that result are often utterly disproportionate. Executives already receive basic salaries that are very high by the vast majority of people's standards. Why do they need bonus schemes that can award multiples of that salary on top, as is often the case? For the sort of base salaries many are paid, shareholders have a right to expect good performance. Only in exceptional cases are signifcant bonuses on top deserved.

This has got to stop.

I have no compunction whatsoever in pointing out simple truths.

Here's a nice simple suggestion: executives should not expect to receive bonuses. Large bonuses for already highly paid staff are a pernicious idea that has spread from the insulated world of the City. Any that are paid should be at the discretion of the Board, in consultation with shareholders on what is fair & reasonable, in the light of performance. Option awards can be offered, but only in modest amounts (proportionately similar to those offered to other employees) with an exercise at or above the share price at the time the award - that is sufficient to "align interests". There. That does away with a tome that is of little value to anyone except the executives benefiting from this ludicrous charade.

It's a time to call a spade a spade.

Mark

emptyend

21st May '12

Why is it that executives require complex schemes that require pages and pages to explain, when other employees don't?

Would you prefer they returned to the old days and didn't even tell shareholders what they were doing? Regarding "complexity" the only element of "complexity" is the need to establish a proper peer group against which management performance can reasonably be compared. One should always look closely at the comparator group for LTIPs and not be afraid to argue with their composition (which should generally reflect a list of companies that are genuinely comparable, within the same sector so as to exclude the impact of general external factors).

I'm sorry, but IMHO these LTIP schemes been dreamt up by "remuneration consultants", at the behest of the Board. They are overly complex

Whilst I deplore the excessive growth of remuneration consultancy, such advisory services have been offered to corporate clients for a minimum of 30 years to my own certain knowledge. The fact that (well-designed) LTIPs actually align management to act in shareholders interests - and only pay out well if shareholders have benefited from superior performance by the management concerned - should be a matter which is welcomed by shareholders, not pilloried as part of a general war against high pay.

I have considerable sympathy for the idea that executive compensation as a whole needs to be reined in, especially in the largest companies.....but focusing your attacks on LTIPs in general is simply wrong.

Here's a nice simple suggestion: executives should not expect to receive bonuses. Large bonuses for already highly paid staff are a pernicious idea that has spread from the insulated world of the City. Any that are paid should be at the discretion of the Board, in consultation with shareholders on what is fair & reasonable, in the light of performance. Option awards can be offered, but only in modest amounts (proportionately similar to those offered to other employees) with an exercise at or above the share price at the time the award - that is sufficient to "align interests".

Actually from a shareholder standpoint, one would surely want to see pay for managements to be as close to "payment by results" as possible!? I would very much rather see the focus of opposition to high pay being on salaries and benefits, so that UK companies ceased to chase US pay scales and nobody got paid more than (say) £500,000 or so in their base package. Their rewards should come PRIMARILY from having actually delivered results for shareholders, so LTIPs or options should play a major role in their compensation package. And bonuses should be quite rare (maybe one year in three at most, as a guide), reflecting their exceptional nature.

If you persist in attacking the performance-related elements of pay packages then the consequence will be that public listed companies will gradually become managed by people who are relatively risk averse and who aren't good enough to earn substantial rewards for their shareholders. I can guarantee you that the remuneration packages in private unlisted companies will continue to offer rewards that are heavily skewed towards success - and the result will be that there will be fewer early-stage growth companies offered to investors in the public markets, because managers will be better-rewarded (and get a lot less grief) by staying unlisted.

Shareholders should be aiming for "payment by results". They should NOT be aiming for "low pay" per se .......because, taking this argument to its logical conclusion, ultimately if you pay peanuts you get monkeys. As I said above in bold, I have sympathy with the idea that executive compensation at the top end has become excessive.....but for heaven's sake pick the right targets to attack!

loglorry

21st May '12

I have not studied this in detail for the Soco LTIP but being paid against rolling five year performance against a peer group sounds a bit skewed in their favour. If Soco had done very well in the first 3 years of that 5 years say (for example trebbling share price) then they could perform fairly badly for another couple of years and still outperform on a five year basis.

The remcom just needs to pick a time period when the share price did very well against its peers when setting up the rules (which can be reviewed later). If they had made it last 2 years they'd have lost their LTIP.

Bottom line is that it basically comes down to greed and the general apathy of share holders or more accurately the inability for them to get organised enough to stop it.

It is great that Mark and others are doing something about it but "shame" and "embarrassed" won't make a jot of difference. I'm be very happy to be "embarrassed" for a few million pounds and a bit of self-justification and a nice holiday will sort that out.

davjo

21st May '12

Bonuses should relate to the achievement of any exceptional achievements during the year under review. So, for example, delivering projects ahead of time or under budget might be bonusable events

I wonder about that when you consider, in the case of E&P companies, such projects are contracted out to third parties and overseen by outside consultants employed by the company, all of whom are probably subject to either overrun penalties or success bonuses themselves. How can executives justify bonuses granted on the back of work done by third parties?

Just sayin' :-)

loglorry

21st May '12

Well said Davjo particularly when in many cases the companies aren't even operators on the projects. I'd also point out that I've seen many cases where targets are missed but they are just forgotten about or history re-written. A case in point is Soco's management awarding themselves shares for doing a great job on TGT.

Errrrmmm were the targets set by them some time ago not more like 110,000bbls/day by now not the 40,000/day the seem to have achieved to date?

There might be very good reasons why these targets are missed and sh*t happens but surely in this case bonuses don't happen.

Anyway we can moan and whine all we want but I doubt it will change that much so I'm inclined to focus on changing what I can and ignoring the rest.

Log

emptyend

21st May '12

How can executives justify bonuses granted on the back of work done by third parties?

Taking that argument to its logical extreme, everything that a management does is actually delivered by third parties - be they contractors or employees!

It is the job of management to get the best out of the resources at their disposal, whether their name is De Matteo, Hodgson or some anonymous oil sector CEO ;-)

Re loglorry's point:

The remcom just needs to pick a time period when the share price did very well against its peers when setting up the rules (which can be reviewed later). If they had made it last 2 years they'd have lost their LTIP.

AFAIAA, they are always rolling periods of 3 years (or 5 in some cases). There is no discretion. And, with respect to SOCO's LTIP, there have certainly been a couple of periods where LTIP awards haven't vested. In 2012, as it happens, they appear to have outperformed two thirds of the 25-company comparator group over the preceding 3 years (these things are decided independently by external consultants...though IMO their reports should be made available to shareholders).

ps.....

Errrrmmm were the targets set by them some time ago not more like 110,000bbls/day by now not the 40,000/day the seem to have achieved to date?
There might be very good reasons why these targets are missed and sh*t happens but surely in this case bonuses don't happen.

As you know, I certainly think this should have merited a significant reduction in their bonus (unless perhaps there was some other unseen over-achievement). The figure expected was 90k though, not 110k.

loglorry

21st May '12

(these things are decided independently by external consultants

Phew, that's ok then - I'm sure they are totally unbiased ;-) I'm pretty sure if these consultants want repeat business they'll not be too keen on biting the hand that feeds them.

Anyway I think we all know what the gig is - we just have to accept it and make sure we invest alongside directors as fellow shareholders rather than allow directors main motivation to be to award themselves excessive pay. To me that seems to be the easiest and clearest route to ensuring that directors motives are aligned with shareholders.

ee - ok 90K/bpd althought I do recall 110K/per day being mentioned. Half the expected though is probably why we are seeing a share price half of what we expected. That in my opinion doesn't deserve a slap on the back and a big bonus.

Log

marben100

21st May '12

Hi ee,

Taking that argument to its logical extreme, everything that a management does is actually delivered by third parties - be they contractors or employees!

That's actually a very good point - and, at heart explains the objection I have to these huge payouts. Yes, good executives have an important role in setting company strategy and culture - but ultimately its those that work hard for them that do the delivering (in most cases). That's why the question of fairness arises.

I also agree with your sentiment that bonuses should primarily relate to what's been achieved in the year the bonus relates to. The problem is that because the bonuses have become so large, they can have a distorting effect. It is often cited that one of the drivers behind the banking crisis was short-term thinking, focussing on achieving huge short-term rewards.

That's why these LTIPs have been in favour, but a better solution is surely just not to have these huge bonuses in the first place? Where executives have delivered a truly exceptional performance, the rem. com. could propose a bonus, subject to a discrete binding vote at the AGM. That would cut out all the unnecessary paperwork and ensure shareholders had an appropriate say. Executives should not expect to get bonuses as a matter of "right".

ShareSoc will continue to draw attention to these cases, in an effort to prompt change. But, of course, this is only one area amongst several we are seeking change in (see our policies for further details).

Cheers,

Mark

carmensfella

21st May '12

This is a very good thread and throws up most of the arguments against some of the schemes used for such high remuneration even in companies where there can be a thin line between success or failure.

ShareSoc is looking at setting up a committee of say four or five of its members to look at this specialist area of remuneration and report to the Board of ShareSoc with recommendations. This is such a high profile issue at present and it needs concentrated time and effort from committed investors to help set guidelines for best practice and help to differentiate the good schemes and those that smell of greed or poorly set targets by remcoms !

If any of you would like to be on the ShareSoc panel and provide help in this key area why not contact ShareSoc and make a real difference ?

emptyend

21st May '12

Hi Mark,

That's actually a very good point - and, at heart explains the objection I have to these huge payouts. Yes, good executives have an important role in setting company strategy and culture - but ultimately its those that work hard for them that do the delivering (in most cases). That's why the question of fairness arises.

......mmmm. I can certainly see the argument about fairness - but IMO the "fairness issue" is essentially one of a) politics and b) practicality. I don't think it is the role of shareholders to act as arbiters of "fairness" per se. As you know, there are suggestions from politicians about capping the relationship between the lowest paid and the highest paid in an organisation. That is perfectly valid ground for politicians to opine on - but one that isn't without its own potential consequences....because, taken to extremes (and I know this isn't being proposed, but one has to be aware of the marginal impacts!), this would potentially remove the profit motive from UK companies and undermine the way the economy works - which I suspect wouldn't be at all in shareholders' interests!

Regarding "practicality", managers have to have an eye on whether excessive differences undermine the ability of their companies to perform. I suspect that in the vast majority of cases, there is no undermining effect at all - but managers of large labour-intensive businesses would need to be particularly alert to such points

I also agree with your sentiment that bonuses should primarily relate to what's been achieved in the year the bonus relates to. The problem is that because the bonuses have become so large, they can have a distorting effect. It is often cited that one of the drivers behind the banking crisis was short-term thinking, focussing on achieving huge short-term rewards.

That's why these LTIPs have been in favour, but a better solution is surely just not to have these huge bonuses in the first place? Where executives have delivered a truly exceptional performance, the rem. com. could propose a bonus, subject to a discrete binding vote at the AGM. That would cut out all the unnecessary paperwork and ensure shareholders had an appropriate say. Executives should not expect to get bonuses as a matter of "right".

I think we have common ground in opposing the payment of material bonuses as a regular feature of compensation. As I suggested above, "bonuses" should be the exception, not the rule. If there is a particular matter that is of such crucial importance that it needs a special incentive (such as, for example, the execution of the Cairn India sale to Vedanta), then a bonus is appropriate - and if management have gone significantly above and beyond the call of duty and have materially exceeded reasonable expectations for performance, then again a bonus could easily be justified. But they shouldn't be a matter of annual routine or be based on "easy" to hit, "business as usual" targets.

I am, however, wholly in favour of (well-designed!) LTIPs. They pay out if the management has performed for shareholders - and they don't reward failure. As with all elements of compensation packages, they can be open to abuse and so the details of the scheme rules may need to be challenged (you may recall me challenging the comparator group that Dana used)....but I have no problem at all with the principle!

Re loglorry's point about independence, that is why I suggested above that it would be a good idea for shareholders to be given sight of these "independent" reports that analyse whether the vesting criteria have been met in whole, in part or at all.......it is an important element in transparency.

davjo

21st May '12

Taking that argument to its logical extreme, everything that a management does is actually delivered by third parties - be they contractors or employees!

Well that's not entirely true as there is one important difference in that the company's employees won't suffer financial penalty for not meeting the target whereas a third party will pay a penalty...that's common as muck when third parties miss agreed targets. What we are talking about here is the company awarding a contract which has already got incentives priced in for the third party to perform and then directors paying themselves a bonus if the third party actually achieves what it is financially incentivised to do. Strikes me as paying twice for the same thing which cannot be justified.

emptyend

22nd May '12

What we are talking about here

Perhaps you have something specific in mind. I don't however. Management is almost always a very complex mix of activities involving employees and third parties (some of which may have incentives....or, more commonly, penalties for non-performance.....but very many won't).

Obviously you would have a point if (substantially) the entire business of a company was the execution of a contract which contained financial incentives for a third party. But AFAIAA there is no example of such a company being publically traded.

MadDutch

22nd May '12

Exceptionally good thread! Well done everyone, and especially the founders and active members of Sharesoc.

I liked Loglorry's comment in post 10;
I'm pretty sure if these consultants want repeat business they'll not be too keen on biting the hand that feeds them.

There is a solution to that problem; shareholders should have the right, by majority vote, to sack the consultants and / or the remuration committee. That would increase their incentive to explain their reasons convincingly and remove their incentive to over pay.

MadDutch

emptyend

22nd May '12

There is a solution to that problem; shareholders should have the right, by majority vote, to sack the consultants and / or the remuration committee.

The already have the right to get rid of any of the directors. And, indirectly, they can get rid of consultants etc too.

Most of the time all these do a good enough job to avoid the sack.

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Mark Bentley questioned Premier's "incredible" level of pay awards at AGM

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Isaac

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