And, as might be expected, easyJet has been completely transparent about his pay. In the announcement in early November, it disclosed not only how his pay package is structured, but also why: the focus is to reward success. “This is achieved through setting base pay at a competitive level, offering modest pension and benefits, and with the potential to earn above-market variable pay subject to the achievement of demanding performance targets,” the company said. So, his £740,000 salary is guaranteed; beyond that, significantly more (worth about £3.3m on award) will depend on his and easyJet’s performance. What about buying out outstanding awards from previous employers? That’s covered by a share award on joining; whether any of these shares vest in three years’ time will depend on Mr Lundgren’s performance. What if he fails? That’s covered too: outstanding bonus and share awards can be forfeited if what easyJet coyly calls “certain defined circumstances” happen. His pay package is high, admittedly, but easyJet is a £5bn-plus company.
There is nothing remarkable about this – being transparent about pay is standard practice for most companies. Mr Lundgren’s pay package is consistent with easyJet’s policy on external appointments, which it sets out in its annual report. There is also a section on its policy on leavers – what they are entitled to if they are sacked; what they sacrifice if they resign. The same goes for Empiric Student Property (ESP). Although it has not as yet announced the severance terms for Paul Hadaway, its recently departed chief executive, we know that they will be consistent with its remuneration policy. After its chief financial officer, Michael Enright, stood down, his leaving terms were announced publicly. He received pay in lieu of notice worth a year’s salary (£270,000 – presumably because he was on a 12-month rolling contract) plus another £50,000, described diplomatically as “settlement in any claim arising in connection with cessation of employment”. He also lost his bonus for 2016 and 2017 and forfeited his share awards for the past three years.
Universities
Contrast this with what happens in areas of the economy beyond quoted companies. Bath Spa University hit the headlines recently when it too stood down its chief executive, Professor Christina Slade. This is an organisation with an income of about £75m a year and with assets worth less than a quarter of Empiric’s. Her annual salary had been £250,000 plus benefits of £83,000, but her payment for “loss of office” seemed way out of proportion at £429,000. The university appears unable to say exactly why it is so large. A spokeswoman was quoted as saying that the severance represented “value for money”. An interesting choice of words.
To paraphrase Oscar Wilde: for a single city to lose one vice-chancellor may be regarded as a misfortune; to lose two looks like carelessness. For Bath’s other university is also losing its chief executive (a role called ‘vice-chancellor’ in the trade). The outcry over Dame Glynis Breakwell’s annual salary should not have been a surprise. She’s the highest paid vice-chancellor in the country and her pay has been controversial for years. But this year, she felt obliged to resign after it went up from £451,000 to £468,589. She is now serving out her notice, but the reason for her hastened retirement seems not to have been so much about her pay – she had ridden out criticism of that before – but because of the bumbling process by which it was determined. In other words: a failure of corporate governance.
This was confirmed in a critical report by the Higher Education Funding Council for England (HEFCE) in November. Like companies, universities have remuneration committees – except that Bath’s failed to keep adequate minutes and so could not adequately explain how its decisions were made. Worse, Dame Glynis was a member, although she is said to have absented herself when her pay came under discussion. Like companies, the remuneration committee reports back to a higher authority: the board of directors for companies, a ‘council’ for universities. There was insufficient evidence that the Council at Bath had considered her pay properly. As with companies, the chair of this higher authority is effectively the ‘line manager’ of the chief executive. To avoid a conflict of interest, companies ensure that a different person chairs their remuneration committees. At Bath, one person performed both roles. The impression given is of a university controlled by a coterie suffering from a hubristic miasma of amateurism when it came to pay.
Companies do it better
What’s surprising about the furore over top pay in universities – and not just in Bath – is that, compared to listed companies, they have relied on light-touch regulation on how they conduct themselves. True, committees abound, but how effective are they? Companies follow codes of conduct that have been reviewed and tightened many times over the years. To help them stay on top of the bureaucracy, every year the Investment Association summarises the main issues in ‘Principles of Remuneration’, which it sends to the Chairs of Remuneration Committees of FTSE 350 companies. The focus this year includes a reminder about holding down top pay, the need to link personal performance to company strategy and a desire for greater transparency.
The result is that company annual reports are published in similar formats, including a remuneration report that typically runs to more than 10 pages. This includes a uniform calculation of how much the chief executive actually received during the year (the single figure of total remuneration). Meanwhile, universities still operate as companies used to, with the bones of their chief executives’ pay warranting a mere footnote in their accounts. The rest has to be wrenched out of them bit by bit. It has emerged that Dame Glynis, for example, has a trophy house provided for her in one of Bath’s best Georgian crescents. If its notional rental value is £5,000 a month, that makes it a benefit worth £60,000 a year. Throw in the annual value of her pension, car benefit (£10,000), paid living expenses (£18,953) and external directorship fees – and her total pay becomes somewhat more than the figures quoted in the media. If universities set out pay according to the convention followed by companies, her total pay would look more like £600,000 a year. Conjecture? Maybe. But lack of disclosure only fuels speculation.
Rewards for failure
After years of head scratching, it was recognised that for companies, rewards for failure often arise not when the executive leaves, but when he or she joins. Too often, whatever had been written into employment contracts left remuneration committees with limited wriggle room. So, in 2013, in came more controls, designed to prevent companies from becoming held hostage. Companies now have to be explicit about their potential pay packages. Future leaving terms form part of the company remuneration policy, over which shareholders have a binding vote.
So at Empiric, while Mr Hadaway’s exact terms of departure might still require delicate negotiations, the outcome is unlikely to come as much of a surprise. But no such safeguard appears to have applied at Bath Spa University, where Professor Slade’s severance pay (at 1.7 times her annual salary) raised eyebrows. And at the University of Bath, it turns out that after Dame Glynis has served out her notice period, she will be entitled to several months of sabbatical leave – equivalent to a pay-off of about half her annual salary. Quite why top executives should be entitled to sabbatical leave is another question for remuneration committees to take on board.
Rewards for success
If good performance deserves extra pay, the reward can either be a one-off bonus or an ongoing addition to the salary. The problem comes when the executive’s performance is not consistent – as investors well know, past performance cannot be relied upon as a guide for the future. Since salaries rarely go down, building last year’s performance into a higher salary fails to hold the executive to account if performance then falters. Increments from previous years also create a higher platform for increases in the following year, leading to a general cranking up of pay. Companies pay annual bonuses that can be reduced; education establishments mainly reward performance with salary increments that cannot. Some do pay small bonuses, but nothing like the practice in companies. At easyJet, about 80 per cent of Mr Lundgren’s total potential pay is at risk; university vice-chancellors risk little if any of theirs.
The irony is that in their financial statements, universities, like companies, say what they need to do over the next few years to be considered a success. The sort of thing would be to expand research, make international partnerships, attract more students, engage better with them and build more facilities. For their vice-chancellors, it would be a short step to translate the relevant targets into performance criteria on which to hang bonuses.
Creation or evolution?
The focus on high pay in universities has strong echoes with concerns about companies. Media allegations revolve around greed, self-interest and lack of accountability. Both types of organisations are private, autonomous entities, not public bodies. Companies are owned by shareholders, but if shareholders are ineffective, critics say they become more like self-perpetuating entities. Who owns or exerts equivalent control over universities is a moot point.
Universities now have a new regulator, the Office for Students, and a revised regulatory framework has been promised for 2018. But will their proposals align with those principles of remuneration, the tried and tested recommended practice that companies have had hammered out for them over the past 25 years? Or will they ignore this as a template and try to reinvent the wheel?