Small Talk: Small-company fat cats paying themselves almost as generously as big counterparts

Britain’s listed smaller companies are catching up with their larger counterparts in one worrying regard: they’re just as likely these days to be handing out whacking pay increases to fat-cat directors, irrespective of whether they’ve added sufficient shareholder value to merit such awards.

In fact, many large companies have been shamed into adopting less generous executive remuneration packages following revolts from their shareholders in recent years. And the general workforce in the private sector has seen its pay fall – still running at below 1 per cent, average earnings increases in the private sector have failed to keep pace with inflation over the past 12 months.

There are no such problems for the directors of smaller companies, however. Research published today by Incomes Data Services, the independent labour market research organisation, suggests that the average executive director of a smaller company listed on the London Stock Exchange has seen his or her total remuneration increase by 15 per cent over the past 12 months.

It’s nice work if you can get it. Small company directors’ salaries have increased more modestly – by an average of 2.5 per cent according to IDS – but large bonus awards and generous pay-outs from long-term share incentive plans (LTIPs) have enabled them to pocket far larger pay increases than that headline figure suggests. Three-quarters of directors have received a bonus in the past year, while a third have received a pay-out from an LTIP.

“Earnings of directors at small companies have recovered strongly over the last year, but this has been largely fuelled by the pay-out of some large share-based incentive awards rather than a spike in salaries,” IDS’s Steve Tatton confirmed.

For anyone who has kept an eye on the confrontations between many of Britain’s largest companies and their shareholders over the past couple of summers – including the so-called Shareholder Spring of 2012 – this trend will be wearily familiar. Remuneration committees rarely feel the need to hand out big salary increases to their directors because they’re generally giving all sorts of other rewards.

The theory is that bonuses and share schemes align the interests of executives and shareholders – those running the company are only supposed to get paid when they’re adding value for the owners of the business.

In practice, however, the correlation between executive pay and shareholder value rarely appears to be a close one. Over the past year, for example, those highly paid smaller company directors have generated an average share price gain of 8.9 per cent in the case of constituents of the FTSE Small Cap Index – well below the gains they’ve enjoyed. The largest 100 small companies on the Alternative Investment Market have actually seen their share prices fall by 1.6 per cent.

This is to over-simplify: LTIPs in particular tend to pay out on the basis of a complicated formula designed to incentivise directors in a number of different ways over an extended period. In truth, however, that complexity is part of the problem – it makes it very difficult for shareholders to hold executives to account, even though they seem to get the pay-out irrespective of the company’s performance.

IDS’s research suggests that running a small company is no bar to earning a big pay packet. The average smaller chief executive now has total earnings of £668,000 a year, roughly 25 times the salary earned by the typical British worker.

Meanwhile, the lower corporate governance standards that apply for smaller companies, particularly those listed on Aim, mean that robust shareholder challenge of this remuneration is much less common than it has now become at their larger brethren.

Investors, however, must rise to the challenge. It may well be that the many smaller company bosses deserve the huge pay increases they’ve enjoyed over the past year, even if the performance of their shares might suggest otherwise. But shareholders have both a right and a duty to hold them to account.

Young investors are not Aim-less

Who are the new investors in the Alternative Investment Market (Aim)? The tax breaks now available on Aim shares – no stamp duty to pay on purchases and the fact that the stocks are now eligible for individual savings accounts (Isas) – has seen the market become more popular with retail investors over the past year, but research from stockbroker TD Direct Investing suggests it is younger investors who are most enthusiastic.

TD’s figures reveal that 3.5 times as many younger investors – aged between 30 and 44 – are investing on Aim as their older peers. Almost nine in 10 investors in this younger demographic say they are confident in the market’s ability to offer good returns.

Darren Hepworth, global trading director at TD Direct, says the results are encouraging. “We are finally seeing the positive effects of the uplift in the UK economy, with younger investors increasingly showing interest in Aim and taking advantage of the flurry of recently listed high-profile companies for them to choose from,” he says.

It may also be the case, of course, that older investors are more wary of Aim – having been caught out by the market slump of a decade ago following the dot.com collapse.

Call to extend energy refunds

Smaller businesses could miss out on a windfall from the energy sector unless the industry is forced to extend a refund campaign that is currently targeted at household customers only, the Federation of Small Businesses is warning.

John Allan, the group’s chairman, said he welcomed the announcement by leading energy companies last week that they would seek to repay the money held in accounts closed by customers who had moved to a new provider without claiming what they were owed.

But he called for the scheme to be extended to the sector’s small business customers, which have been caught out by the same problem.

The companies have accumulated about £153m over the past six years. Mr Allan said: “Energy companies are sitting on money that does not belong to them and it is high time they paid it back – the industry’s announcement is the first step to doing this but it is important that companies do not stop at only paying back domestic consumers.

“Energy companies also owe money to many small business customers who obviously would like their money returned,” he added.

Small Business Person of the Week: David Lefevre, Chairman, Epigeum

“We supply online courseware and other services to more than 200 universities in 27 countries, but the business really got started by accident. In 2005, I was working at Imperial College and we wanted to build a really high-quality multimedia course for our law faculty – we got some money from Imperial and we really went to town on the course; we got contributions from some of the college’s Nobel Prize laureates, we commissioned a specialist design agency to help us and we got the TV presenter Adam Hart-Davies to present it.

“The upshot was that the course became hugely popular and other universities started taking an interest. Then we wanted to build five more courses, but Imperial didn’t have the resources for that, so we began asking other universities to collaborate with us – 15 signed up. At this stage, we realised we were effectively running our own business, so we set up Epigeum formally, with the help of Imperial’s advisers.

“Since then, the business has just taken off. The business model is that we collaborate with other universities to fund the cost of developing each new course – and to make it as good as it possibly can be – and they then get it at no charge while we sell it to other institutions.

“These days, we’re entirely separate from Imperial, though it still owns a stake in the business.