Rolls-Royce links executive pay more closely to performance

Rolls-Royce is to pay the base salary of its chief executive partially in shares rather than cash in an unusual move among FTSE companies that links remuneration more closely to performance after a turbulent year that forced the group to raise £2bn in a rights issue to shore up its finances.

Warren East, chief executive, will receive 30 per cent of his base salary in shares over the next three years as part of a revamp of the aero-engine group’s wider remuneration policy detailed in its annual report.

East will be granted rights over the shares on a monthly basis and will need to hold them for a minimum of two years. His base salary will remain unchanged at £943,500, but his cash take home pay in 2021 will be 30 per cent lower. 

Rolls-Royce’s chief financial officer will receive 20 per cent of his base salary in shares. The company’s shares closed at 105.3p on Wednesday, marginally higher than they were this time a year ago and 3 per cent down on the day.

One remuneration specialist said paying chief executive salaries partially in shares is “very uncommon in the FTSE”, with the exception of some banks.

[The pay policy] removes any risk of the sort of ‘lottery win’ that a more traditional long-term incentive plan could generate from a share price recovery driven by factors largely outside of our control

Rolls-Royce’s decision comes as many companies have reviewed their pay policies in the light of the pandemic, particularly bonus schemes.

Several businesses, including Informa, SIG, Provident Financial and McBride have proposed so-called value creation or restricted share plans that award executives largely because of share price movements, while others have changed the targets to qualify for bonuses.

Rolls-Royce, which has been badly hit by the coronavirus pandemic with airline fleets grounded throughout the world, said it was also bringing in a new incentive scheme that would include shorter-term targets for this financial year. The new policy, it said, was designed to “reflect the urgency of our challenges and the importance of delivery and execution in 2021”.

Rolls-Royce raised about £5bn in funds late last year through a rights issue and new credit lines. The sharp falls in air travel during the pandemic meant much of its income dried up. Long-term contracts that pay per number of hours that its engines fly are a mainstay of its civil aerospace division, which accounts for roughly half of the group’s revenues.

The new incentive plan, which will be put to shareholders in May, will run for the next three years and replaces the company’s current annual incentive and long-term incentive plans. The short-term targets will be aligned with promises made by Rolls-Royce last year, including that it would generate at least £750m of free cash flow as early as 2022, depending on the pace of the recovery.

At the same time the pension contributions for East have been reduced. He previously received 23 per cent of his salary as a contribution to his pension. This has now been cut to 12 per cent, aligning it with the rest of the workforce.

Joel Griffin, director of performance and reward at the company, said the intention was to “incentivise and reward the actions of our management team as we deliver on the commitments that we have made to shareholders and other stakeholders”.

The policy, he added, would not “include any cash bonuses” and “remove any risk of the sort of ‘lottery win’ that a more traditional long-term incentive plan could generate from a share price recovery driven by factors largely outside of our control”.

Shareholders have been supportive of the changes in remuneration at some companies, but other businesses, including Cineworld, Hollywood Bowl and Future, have been hit with investor revolts over pay in recent months. 

Earlier this week, Legal and General Investment Management, the UK’s largest asset manager, warned it will vote against companies that fail to rein in chief executive pay in the wake of the pandemic.