Executive Remuneration Analysis of Vodafone.
Executive Remuneration Analysis of Vodafone 1. Introduction Executive remuneration is the compensation which company rewards for the executive directors. Since the early 1980s, executive payment increase rapidly. The unjustified increasing of executive remuneration pushes the reform of remuneration policy. The Cadbury code mentioned this problem in the Code of Practice in 1995. Cadbury gives some suggestions to companies about the executive remuneration policy.
According to his suggestions, companies should dividend total payment into the basic salary and performance-based bonus, and the remuneration report should publish in the annual reporting every year . In additional, UK government provides the vote right for shareholders to supervise the company’s executive remuneration, it also can force executive directors taking investors’ interest into account when they design the company strategy . The analysis of big companies’ remuneration policy is more emphasize by investors and government, especially after the 2008 financial crisis.
Investors are paying more attention to whether the executives deserve the high reward. Therefore, the analysis of executive remuneration is more necessary and valuable. Companies in FTSE 100 have the highest market capitalization in UK, and it means the analysis of FTSE 100 companies is most valuable. Vodafone Group, as one of the biggest company in the FTSE 100 companies, has business in almost 70 countries. And the market capitalization is nearly ? 90bn . Last year, Vittorio Calao, the CEO? of Vodafone received around ? 0m for remuneration in fiscal year 2012, which is one of the highest remuneration in the FTSE 100 . Although the executive rewards are higher than others in the FTSE 100, there still are 96. 12% shareholders voting in favour with the Vodafone’s remuneration policy . This raises the question that why there are a huge amount of shareholders convincingly supports their highest remuneration. This essay analyses the executive remuneration for Vodafone Group. Firstly, it will talk about the remuneration principle. Then the Remuneration Committee will be discussed.
This part aims to measure whether the Remuneration Committee according to the UK Corporate Governance Code. The third part will explain the remuneration package of Vodafone Group, both base salary and various bonuses are included. At last, the essay will discuss the rationality of Vodafone’s executive remuneration from the perspectives of remuneration policy itself and the comparison with other companies. 2. Remuneration principle The aim of Vodafone’s executive remuneration is driving executives to achieve the company’s long-term strategic goals by offering an attractive and competitive reward .
Vodafone wishes to make sure that their executive directors keeping in the highest level in work by providing an attractive payment. For example, a part of rewards are measured by the performance for this year. Therefore, executive directors were given an opportunity to achieve the truly exceptional performance. The remuneration package is determined by Remuneration Committee after Comprehensive consideration. The Remuneration Committee will choose some relevant group of comparators when setting total reward. It makes sure that the executive remuneration policies are considered on a total compensation basis.
The comparators are choosing from some basic considerations, which are as follows: 1) top European companies, 2) top UK companies, 3) particularly for scarce skills, and 4) the relevant market in question . These comparators mean that Europe is the major region for business for Vodafone, and the company is original from UK. According to above three principles, the external comparators are consisting by similar size companies, and the European top 25 companies and a few other select companies relevant to the sector.
Additionally, the external comparator group do not including the financial companies, such as bank and insurance company. Another important Remuneration principle is that the rewards will related to the performance both long-term and short-term. According to the Annual Report of 2012, performance-based reward account for 70% in the whole remuneration package . Vodafone build a link between executive directors and shareholders by this way, in order to force executive directors think about shareholders’ interest. 3. Remuneration Committee
According to the UK Corporate Governance Code, the Remuneration Committee must include at least three independent non-executive directors . The Remuneration Committee of Vodafone is consisting by independent non-executive directors and running independently in the company. The chairman of Remuneration Committee is Luc Vandevelde, and there are another five members in the Remuneration Committee. All of them are the non-executive directors in company. There also are two external advisors: PricewaterhouseCoopers LLP (‘pwc’) and Towers Watson.
Pwc is responsible for performance analysis and giving suggestions about company strategy and measuring the performance. It also supports the international business of Vodafone, such as tax, finance, compliance and operations. Another external advisor Towers Watson provides the market data of executive payment to Remuneration Committee. They also manage the pensions and benefit for Vodafone . There are a lot of factors need to be considered by Remuneration Committee when deciding the payment package. Firstly, Remuneration Committee consults the CEO and HR directors’ opinion of the appropriate reward package for executives.
Secondly, the external advisors give the Committee another perspective form the external information analysis. They can provide the benchmark of directors’ reward about other similar company on the market. Additionally, Committee also take the company’s strategy into account, both long-term and short-term are important. In fiscal year 2012, Remuneration Committee had five meetings to discuss the Short-Term Incentive bonus, Long-Term Incentive plan and basic salary in order to determine the total remuneration packages of the executive directors appropriately .
Remuneration Committee particularly report four chief executive directors in the Directors’ Remuneration Report, including Chief Executive Vittotio Colao, Chief Financial Officer Andy Halford, Chief Technology Officer Stephen Pusey and Regional CEO Europe Michel Combes, and the reporting also include the reward of non-executive directors. 4. Remuneration package The Vodafone remuneration package is divided into five parts: base salary, Global Short-Term Incentive Plan (‘GSTIP’), Global Long-Term Incentive Plan (‘GLTI’) base awards, Global Long-Term Incentive Plan (‘GLTI’) co-investment matching awards and benefit .
These parts reflect the remuneration policy of Vodafone which make the executives holing a lot of company shares to align the interest of executive directors and investors. It also obeys the UK Corporate Governance Code that keeping the reward in a level which is attractive and motivate to the directors, and designing the performance- related income based on long-term strategy. Base salary aims to attract and retain the best talents. It reflects the directors’ level of skill, experience and the responsibility in Vodafone. In fiscal year 2012, Committee decided the base salary stay at the same level with 2011.
Global (‘GSTIP’) measure the performance in this financial year with the short- term financial and non- financial target, and the GSTIP is paid in cash in June 2013. The related performance is service revenue (25%), EBITDA (25%), adjusted free cash flow (20%) and competitive performance assessment (30%). This bonus can flow from 0-200% of base salary, and it reward 93. 4% of target for financial year 2012. Global Long-Term Incentive Plan (‘GLTI’) is consist of performance shares which award every year and vest three years later to force directors on the Vodafone’s long-term strategy.
The vesting of performance shares is determined by the adjusted free cash flow and relative TSR performance. Both operational performance and external performance are included in the two measures in GLTI. The target GLTI face value of CEO is 137. 5% for basic salary, and 110% for other directors. In this year, executive directors was rewarded the vesting the shares of 2008 fiscal year at 30. 6% of maximum . Global Long-Term Incentive Plan (‘GLTI’) co-investment matching awards means that executive directors can purchase Vodafone normal shares and turning them to performance shares after holding three years.
Benefit is the pension scheme for the executive director and other benefit such as company car and private medical insurance. 5. Analysis of the director remuneration Figure 1 Total remuneration for 2012 (based on Vodafone 2012 Annual Report) The Figure 1 shows the detail of the total remuneration for fiscal year 2012 including a value for GLTI payment. Without the GLTI vesting during this year, Vodafone actually paid 30. 35m pounds to CEO Colao, 19. 27m pounds to CFO Halford, 21m pounds to Europe region CEO Combes, and 14. 08m pounds for CTO Pusey .
The Figure 1 illustrates that all the four chief executive directors’ incomes are increasing except the CTO Pusey. Although the total rewards were general increased, GSTIP for fiscal year 2012 was decreasing. In the meanwhile, salary and cash in lieu of pension were keeping in the similar level with last year. Therefore, the increasing of total remuneration was due to the significant increasing of the item cash in lieu of GLTI dividends. During the fiscal year 2012, the Global Short-Term Incentive was deduct from last year. The total actual short term incentive payment was 93. %, while the target payment is 100% and the maximum payment is 200% for the basic salary . According to the remuneration policy of Vodafone, GSTIP is influenced by the performance for this year. There are four indicates to measure the GSTIP: service revenue, EBITDA, adjusted free cash flow and competitive performance assessment. According to the 2012 annual report, the service revenue slightly increased to 46. 4bn pounds, which was just arrival the target performance . However, the EBITAD and adjust free cash flow were cut down, especially the adjust free cash flow.
Because of the loss of China Mobile Limited and the dividends of SFR, the actual pay-out percentage for adjust free cash flow is 8. 5, while the target performance is 20% in the whole GSTIP . The policy of GSTIP is related to both the financial and non-financial performance in this year in order to measure the executive short-term performance in a rational way. The target performance is not only based on the Vodafone’s strategy and past operation, but also taking the long-term strategy into account. Figure 2 Adjust free cash flow target and range for awards Based on Vodafone 2012 Annual Report) Figure 3 GLTI award for 2008 & 2009 (based on Vodafone 2012 Annual Report) Opposite the reducing of DSTIP, cash for Global Long-Term Incentive Plan is significant increase. The GLTI is determined by adjust free cash flow and the TSR outperformance of a peer group median. These two indicators consist a matrix in order to measure the internal operational performance and external performance. The long-term operation cycle is three years which means the target performance of financial year 2012 was settled in 2010.
According to Figure 2, the target for 2012 is 18bn pounds, while the actual adjusted free cash flow for 2012 was 20. 9bn pounds . Another important measure is the TSR performance. The figure 3 shows that Vodafone’s TSR was outperformance than the peer group which constitute by the similar size companies. The TSR performance increasing by 18. 5% in 2012, and exceed the target number. Therefore, the TSR performance for 2012 was paid by 100% of maximum to executive directors, while there is only 30% in 2011.
Figure 4 Five year historical TSR performance (based on Vodafone 2012 Annual Report) Table 1 Comparison of Vodafone & BT Group (Base on    ) 201220112010 CEO Reward ?000Total Revenue ?bnCEO Reward ?000Total Revenue ?bnCEO Reward ?000Total Revenue ?bn Vodafone303546. 46282645. 88266844. 47 BT Group250518. 90235920. 1210520. 1 To compare with other similar size companies in UK, figure 4 reflects the Vodafone TSR performance compare with the average level of FSTE 100. From this figure, it indicates that Vodafone’s TSR performance is higher than the average level of FSTE 100.
It means that the Vodafone Group is in a better operation situation among FSTE 100 companies. Therefore, it is reasonable that Vodafone’s executive remuneration is higher than the similar size companies. Additionally, the comparison in Table 1 is shown in similar result. BT Group is another strong competitor of Vodafone in UK telecommunication industry. The numbers in table 1 are published in the annual report for the two companies from 2010 to 2012. The total revenue of Vodafone is basically twice as much as BT Group, while the difference between the CEO remuneration is just around ? m in the three years. Through above analysis, Vodafone remuneration is in a rational level, and it is corresponding to its operation performance. 6. Conclusion All in all, Vodafone executive remuneration is acceptable and in a rational level. It not only reflects the operation performance but also obey the rules of UK Corporate Governance Code. The executive remuneration is setting by an independent remuneration committee which consist by five non-executive directors and two external advisors.
The remuneration report is published by Remuneration Committee in Vodafone’s Annual Report. The remuneration package divide into base salary, Global Short-Term Incentive Plan (‘GSTIP’), Global Long-Term Incentive Plan (‘GLTI’) base awards, Global Long-Term Incentive Plan (‘GLTI’) co-investment matching awards and benefit. Through these five parts, executive reward is related to performance and the investor interest, and can help executives focusing on company’s strategy. Therefore, Vodafone executive remuneration can be seen as a good example in executive remuneration policy.