The Patterson Index
November 2012
Introduction & Methodology
©2012 Pearl Meyer & Partners, LLC
What is the Patterson Index?
The single pay number being proposed by the Government will drastically simplify remuneration
reports, by giving a transparent and easily comparable approach for shareholders to judge.
Despite this welcome simplicity it does raise a number of issues:
• Shareholders must interpret the number and determine whether it is reasonable for the level
of performance from the company throughout the year
• One year does not represent long-term performance which could weaken the link between
pay and performance
• Companies will be obligated to continue reporting former directors’ pay
• Companies could take advantage of the system and introduce longer vesting periods to defer
reporting
How could it be improved?
Patterson Associates, a Pearl Meyer & Partners Practice has developed a simple Index which
captures the value added for shareholders by the company per £1 of compensation paid to the
Chief Executive (CEO) over a four year period. This longer time frame helps to recognise long-term
value creation for shareholders and captures any pay deferred through longer vesting periods. The
Index is important – a simple ‘rule-of-thumb’ guide to pay and performance as well as a guide to
the future value CEOs must deliver if they are to justify their pay packages
©2012 Pearl Meyer & Partners, LLC
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The CEO value added test
•
As a measure of the effectiveness of the company CEO, we have calculated the “CEO
Value Test” figure for the FTSE100 over a four year period
o
We look at Value Added to shareholders by the company between June 2008 and June
2012
•
•
This includes the change in market cap, dividends and share buybacks
o
We look at TDC (Total direct compensation) paid to the CEO in this period
o
We compare the two to give company Value Added per £TDC = The Index
We have looked at 2008 – 2012 data and calculated the value-added in the last 4 years
[27400 individual pieces of data]
Value Added over 4 years
Patterson Index
=
Total Direct Compensation over 4
years
•
The Patterson Index calculation is applied only to those companies that have added value
over the period. Those that have lost value are treated separately.
©2012 Pearl Meyer & Partners, LLC
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Approach - Total value added
•
Using public data from a proprietary database, we calculated Shareholder Value Added over a 4
year period for the FTSE 100 (excluding those acquired, merged or listed during the period)
•
Share price and dividend data are used to calculate the total return over four years. We used the
total number of shares in issue for the financial years at the beginning and end of the period. We
also include share buybacks.
•
Compensation data is collected from the Annual Reports of each company – methodology
described on the following page.
Four year value added period:
5 years Market
Cap. data
June
2008
Not all remuneration
data published
June
2009
June
2010
June
2011
June
2012
June
2013
4 years growth
calculations
2009
2010
2011
2012
2013
©2012 Pearl Meyer & Partners, LLC
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Approach – Total value added continued
• Total value added is comprised of three elements:
o
Change in market cap
We calculate the market cap of each company at June 2008 and June 2012. June 2008
market caps are calculated using the 3 month average share price leading up to 30th June
2008 and multiplying it by the average number of shares in issue for each company’s
2008 financial year. June 2012 market caps similarly use the 3 month average share price
leading up to 30th June 2012 and multiply it by the average number of shares in issue at
each company based on their latest financial year 2011/2012.
o
Reinvested dividends
We include all dividends paid between 30th June 2008 and 30th June 2012.
o
Share buybacks
We include the value of all share buybacks that occurred between 30th June 2008 and
30th June 2012.
©2012 Pearl Meyer & Partners, LLC
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Approach – Total direct compensation
The table below is intended to provide an illustrative example of how each remuneration element would be handled under our methodology:
Year 1
Year 2
Year 4
Current Year
Year 3
Methodology
Q1
Salary
Q2
Q3
Q4
Q1
Q2
Q3
Q4
Q1
Q2
Q3
Q4
Q1
Q2
Q3
Q4
As paid in year
As paid in cash for
performance in year
Annual bonus
Number of shares vesting in
the final two years of the four
year period
Deferred bonus
Long-Term
Incentives
(LTIs)
• Performance
Shares
Number of shares/share
options vesting in the final two
years of the four year period
• Share
Options
• Restricted
Shares
Retention
awards
Number of shares granted in
the four year period counted
at grant and not vesting
Recruitment
awards
Number of shares granted in
the four year period counted
at grant and not vesting
Termination
payments
Number of shares granted in
the four year period counted
at grant and not vesting
Key:
Performance period
Grant
Service requirement
Vesting / Receivable / Realisable
Exercise / Received / Realised 5
Note: The red outline highlights the point at which we count each
element. We ignore holding periods applied to short- and long-term
incentives. All equity awards counted will be ©2012
valued
the 3 LLC
Pearlusing
Meyer & Partners,
month average share price leading up to 30th June 2012.
Share buybacks & dividends
Why are share buybacks included?
• Each shareholder will be receiving £X per share for the shares they sell (assuming that all
shareholders participate equally in the share buyback)
• It is impossible to say whether the company’s share price will go up, down or stay the same
as a result of the buyback as this is dependent on the market’s response and not simply the
act of the buyback
• If the share price does change then that is a secondary effect which we will also count
through the company’s market cap (if the share price change is long-lasting and covers the
three month trailing period we will be looking at)
• This is not double counting as we are looking at things from a shareholder perspective i.e.
they receive money for selling their shares back and they may also benefit from stock
appreciation if it was tactically the right thing to do in much the same way as they may
benefit from any other operational decision made by the company
How much do share buybacks contribute to total value added?
• 40 of the 89 FTSE 100 companies analysed in our research did a share buyback
• There were 11 companies where share buybacks accounted for 15% or more of total value
added - three of these also exceeded 50%
Dividends
• All of the FTSE 100 companies we analysed paid dividends
©2012 Pearl Meyer & Partners, LLC
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Further Information & Contact
Research completed by Patterson Associates, a Pearl Meyer & Partners Company
London Office
For further information please contact:
Patterson Associates - A Pearl Meyer & Partners Practice
London Office
Clifford House
15 Clifford Street
London
W1S 4JY
Catherine Wherity: [email protected]
Alex Locatelli: [email protected]
Fiona Bravery: [email protected]
Other Enquiries:
Fiona Davis-Coleman
[email protected]
D +44 (0)20 7367 5226
M +44 (0)7717 896 489
Kitty Owen
[email protected]
D +44 (0)20 7367 5233
M +44 (0)7920 802 627
www.headlandconsultancy.com
©2012 Pearl Meyer & Partners, LLC
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