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OPINION

Standard Life at the top

Standard Life at the top
April 10, 2015
Standard Life at the top

Can this ever be justified? Standard Life thinks so. It argues that its strategy, set three years ago and on which the performance conditions were based, has changed so much that the conditions are no longer appropriate. After all, the world doesn't stand still. Companies have to adapt and evolve. And Standard Life is no exception.

A couple of years ago, the company only hinted at changes. Third-party assets managed by Standard Life Investments had grown so much that for the first time they outstripped the amount the group managed for its own policyholders - "when is a life assurer not a life assurer?" the Investors Chronicle asked in May 2013. Now Standard Life is trumpeting a "dramatic transformation". That's what the chairman calls it in their latest annual report. No longer a life assurance company with an investment subsidiary for investing its clients' funds, it's now more an investment company with an insurance company attached.

So Standard Life is no longer the company it used to be: the focus now is on fee-based asset management and administration in markets with strong growth potential. To get here, it bought a couple of asset management companies for almost £0.5bn and sold its Canadian subsidiary for £2.2bn. That cuts risk. It also pushes up its share price because investors rate asset managers much more highly than insurance companies.

It's always tricky selling a business. New investments are held back; marketing goes on tick-over; there are all sorts of expenses, such as retention payments to lock in key people. With a sale on the cards, Standard Life held back "certain initiatives and activities" that would have bolstered the profits of its Canadian business. These profits had been on the rise, but in 2014 they duly slipped to £136m (from £251m in 2013). And that's important for pay because senior executive performance conditions were based on the group's operating profits. Apply the formula and senior executives would have had something like 28 per cent of their potential share awards. Had they not tried to sell the subsidiary, their pay would have been higher.

In other words, those performance conditions set in the old life assurance days had drifted apart. Remuneration committees can normally change performance conditions if they no longer make sense - it's called discretion - and that's exactly what Standard Life's did. After consulting major shareholders, it decided to strike Canada out of the calculations and to include the recent acquisitions. The directors say the restated targets are just as tough as the original ones. True, the senior executives will now get almost the whole of their shares awarded (conditionally) three years ago. But that's not because of moving the goal posts, you understand, but because the company has performed well.

Remuneration committees are often reluctant to exercise discretion. They worry about adverse reactions from the media and their major investors, such as... well, Standard Life Investments, who have been critical in the past of over-generous pay deals in other companies. David Nish, chief executive, and Keith Skeoch, who runs the investment arm, each received £2m more than they would have had under the old conditions. There's a suspicion that this might weaken their company's credibility in holding others to account.

Not all investors agree with their decision. Some say restructuring and corporate transaction charges happen every year and it's wrong to exclude them. Some have challenged Standard Life's calculations. It also goes to the heart of what chief executives are rewarded for: if it's personal performance, then it's right to make adjustments so that the boss is only rewarded for what he or she has control over. If it's for company performance, then it's not - moving goal posts won't bring back Standard Life's shortfall in profits in 2014.

But there's another issue here: a counter to short-termism. If selling the Canadian business was the right thing to do for the long term, it makes no sense if the short-term effect is to hit those responsible in the pocket. This sacrifice would have been due to rigorously sticking to performance conditions set three years ago, ones that never envisaged this new scenario. Obsolete performance conditions distort pay and so there are strong grounds for replacing them. The situation lends itself to that well-known retort: when the facts change, I change my mind. What do you do, sir?

 

Honey, I shrunk the company (now what about my pay?)

At first it sounded like largesse. The sale of the Canadian subsidiary enabled Standard Life to give back 73p a share to shareholders, to be taken either as income (as a dividend) or as a capital gain.

But then came the second part of the process. To avoid messy recalculations to rebase the share price, Standard Life replaced every 11 shares held with 9 new ones. The company's worth the same however many shares there are; fewer shares in issue should bring the share price back to about where it was before the special 73p payment.

Looked at separately, these two steps sound perfectly reasonable. But taken together, they're a bit odd. Shareholders have no choice but to sell two shares for 803p (11 x 73p). In theory, this shouldn't matter: the share price was higher than 401.5p when the forced sale took place, but the residual shares should go up in value to compensate. Investors might have preferred a voluntary sale (through a tender offer at a premium) and some might quibble about how this is treated for personal tax but there are pay implications too.

On its own admission, Standard Life has shrunk both its size and its risk; it follows that the jobs of those at the top have also shrunk. If you accept that fixed pay (salaries and benefits) is for doing the job (whilst how well you do the job is rewarded through variable pay) then if the job shrinks, so too should the salary.

But this is where psychology kicks in. Imagine a remuneration committee telling a chief executive that he or she's in for a salary cut: the message is one for jilted lovers: we love you dearly but not as much as you think we do. If that bugs the chief exec (and pay issues easily can), it could affect his or her future performance so why risk it? Suppose instead the chief exec suggests a cut. The Remuneration Committee has the same dilemma. Despite what the boss says, they'd probably assume that he or she wants them to turn down the request. So they probably would.

Standard Life has the opportunity to make a stand. Both chief executives have been well rewarded for steering the company to where it is now. Each earned over £5m last year, mostly as performance related pay. Their salaries are less than 15 per cent of this - Mr Nish's salary was £810k a year ago and Mr Skeoch's was £450k. But salaries are pay for the future. Reducing their salaries would hardly affect their total pay; symbolic though it might be, as a courageous gesture it would strengthen their hand when scrutinising the pay of other companies.