Last month, the Co-op Group’s chief executive, Richard Pennycook, asked for a 60% pay cut. He said that his present pay level, set for an executive charged with turning around a failing corporation, would become excessive as the Group moved into a period of stability and rebuilding.
In a world where executive pay is increasingly seen as disproportionately high and insufficiently connected with performance, this was refreshing. His decision was widely regarded as setting a new, more responsible benchmark for others.
But does it, really? Mr Pennycook’s basic pay before performance incentives is still more than 50 times the pay of a full-time employee on the lowest pay grade. And the publicity about Mr Pennycook’s request distracted attention from the pay levels of other executives at the Group, some of whom also have pay packages well in excess of £1m.
The Remuneration Committee says that in future, the aim will be for total executive remuneration to be “in the middle of the range of pay packages offered by similarly sized businesses for similarly challenging roles”.
At £750,000 per annum after the cut, Mr Pennycook’s basic salary will be below that of Graham Beale, CEO of Nationwide, the UK’s largest building society. And analysis from co-op activist Kat Rose of the Remuneration Committee’s recommendations shows that by 2019, Mr Pennycook’s total remuneration should be less than half of Mr Beale’s 2014-15 remuneration of £3.278m.
But is such a comparison really valid? It could be argued that it shows not that Mr Pennycook’s pay is too low, but that Mr Beale’s is too high. The pay of Nationwide executives has been a matter of considerable controversy – and both organisations are setting executive pay awards in relation to those at joint-stock corporations, which are increasingly under attack from shareholders.
Recently, 60% of shareholders at BP voted against the recommended pay award for its CEO, Bob Dudley. And there have been shareholder protests at companies as diverse as Lloyds Bank, Shire and ITV. Should the Co-op Group – or, for that matter, the Nationwide – really be using contested pay awards at joint-stock corporations as benchmarks for its own executive pay levels?
There is another inconsistency too. The Remuneration Committee says the intention is to move towards a greater proportion of performance-related pay in executive remuneration packages. But that is not what the chart (above) shows. Rather, it shows that the proportion of performance-related remuneration in relation to base pay will be substantially smaller for Mr Pennycook by 2019.
Performance targets are important for Group executives, since they are accountable to members and colleagues for ensuring the long-term prosperity of the Group. The targets in force from 2013-15 were concerned with rescuing the Bank and turning round the Group.
Now, as the Group moves out of crisis, a new set of targets for the next three years have been set. These highlight debt reduction, colleague engagement, membership spend and brand health. Of these, by far the most important is debt reduction.
The new annual report shows that the Group remains highly indebted. Debt service is a significant proportion of its expenditure, and it has substantial debt repayments due in 2018, 2020, 2025 and 2026. It will probably need to refinance much of this in an interest rate environment expected to be less friendly to borrowers than at present.
Given the continuing fragility of the Group’s finances, it seems sensible at the moment to make the remuneration of Mr Pennycook and other executive directors principally dependent on their ability to reduce debt in relation to Group earnings, although once the debt is under control, colleague engagement and membership spend should become more important.
So the fact that Mr. Pennycook’s remuneration is apparently set to become less, rather than more, performance-related is a matter of some concern. If performance targets are to be credible, the Remuneration Committee will have to address this at some point.
On the non-executive side, matters are complicated. The Remuneration Committee observes that although non-exec directors’ fees have risen, so too has their expertise.
“Whilst it is apparent that non-executive directors’ remuneration has risen between 2014 and 2015, few will find this surprising when the levels of business expertise the new directors bring to the Group are also different from that of their predecessors,” it says.
“Calculating the exact level of that increase is challenging because of the eclectic nature of directors’ remuneration payments in 2014.”
And it further notes that the independent chairman, Allan Leighton, has opted not to receive his £250,000 salary, preferring it to be paid to the Co-op Group Foundation for use in its charitable work.
Kat Rose compares non-executive directors’ fees favourably with those at the Nationwide. She concludes: “Executives’ remuneration packages would appear to have more areas that could create cause for concern than the non-executive directors’ pay.”
It remains to be seen what Co-op members will think about the executive pay awards and the increases in non-executive directors’ fees. They will be required to vote on them at the forthcoming AGM. Perhaps we will see a membership rebellion to match the shareholder rebellion at BP.
To my mind, far more significant than Mr Pennycook’s pay cut are the changes to pensions and benefits at all pay grades, and the raising of pay rates for the lowest-paid workers. These go some way towards levelling the playing field.
Opening the pension scheme to all workers irrespective of length of service is a welcome change. So too is the flat 10% employer contribution level at all grades: setting a higher level for top executives was surely always incompatible with co-operative principles.
I would like to see the Co-op Group conquering its nerves and taking a lead in cutting executive pay down to size
Overall, I concur with Kat Rose’s view that the remuneration changes are on balance positive, when she says: “The proposed remuneration policy represents significantly better value for money and a few more co-operative elements, than the previous one.”
She also remarks positively on the ease of access to financial information in the new-style report and accounts. This annual report is vastly improved from previous ones, notably the 2013 report which was a masterpiece of obfuscation.
Reflecting the desire of the members’ council for more transparency – and the Group’s recent acquisition of the Fair Tax Mark – this report is clearly laid out, easy to read and contains plain English explanations of technical terms.
There are a few things I would take issue with, such as the fact that the report headlines net debt rather than debt service cost, which in my view gives a falsely rosy position of the Group’s finances. However, overall this report is a model of good practice from which other organisations would do well to learn.
The Co-op Group is no longer in imminent danger of collapse. But the annual report shows that there is still more work to do to restore it to health. And there is more work needed to establish co-operative principles, too. For me, addressing the still-wide gap between executive remuneration and the wages of ordinary colleagues is essential. Fair pay, it is not. I would like to see the Co-op Group conquering its nerves and taking a lead in cutting executive pay down to size.
If, as a result, some executives leave for greener pastures, are they really the sort of executive that should be leading a co-operative?