Rolls-Royce CEO's $1.1 Million Bonus Vexes Business Lobby

  • IoD says payout ‘doesn’t sit well’ after drop in annual profit
  • Award was triggered after key numbers still beat estimates

Rolls-Royce Holdings Plc’s decision to award Chief Executive Officer Warren East a bonus of 916,000 pounds ($1.1 million) even after the aero-engine maker’s full-year earnings plunged was ill advised, according to the Institute of Directors, which represents U.K. business leaders.

East was handed the payout after underlying pretax profit fell 49 percent to 813 million pounds in 2016, with only a “modest” improvement forecast this year. While the CEO has cut 700 middle-management posts since taking over in 2015, he has yet to detail plans for restructuring weaker parts of the group.

“Bonuses need to be linked to performance and at Rolls-Royce it’s been a difficult 12 months,” Oliver Parry, the IoD’s head of corporate governance, said in an interview. “The idea that the CEO is receiving a bonus after two profit warnings doesn’t sit very well with investors.”

Rolls-Royce also posted a 4 billion-pound net loss, including a 4.4 billion-pound non-cash adjustment to its currency hedge book following the slump in the pound, and 671 million pounds in charges to settle historic bribery allegations.

East was awarded 55 percent of the maximum possible bonus after London-based Rolls still beat key profit and cash targets, according to its annual report published on March 9. Employees across the group also qualified for what will be the first such premium for three years.

Rolls-Royce reiterated in an emailed statement that 2016’s underlying earnings had beaten analyst estimates, adding that its remuneration committee “scaled back” executive bonuses by ignoring the positive impact of of one-time items such as foreign-exchange benefits, in light of the fact that shareholder returns were down over the year as a whole.

Salary Freeze

Salary increases for 8,000 managers and executives will also be deferred until September, with no backdated payments, Rolls said in a message to staff revealed by Bloomberg on Feb. 28. East, who received a total pay package worth 2.1 million pounds for 2016, will get a 2 percent raise.

Still, the remuneration panel is also seeking to lift East’s total achievable bonus to 250 percent of his salary from 180 percent as part of a plan to “attract and retain” high-quality staff. The multiple would increase to 220 percent for other executives, and as much as 300 percent for a new CEO.

Rolls will hold an “annual general meeting for employees” in Derby, its biggest manufacturing base, in May, the same month as its actual AGM, to strengthen links with workers, Chairman Ian Davis said in the annual report. He said Rolls was partly responding to Prime Minister Theresa May’s proposals for worker representation on boards, binding shareholder votes on remuneration, and the publication of the ratio between pay for executives and workers.

“It’s good that they’re planning this staff meeting, but it’s a shame they might be spending a lot of the time then discussing this pay package,” said Stefan Stern, director of the High Pay Centre, which lobbies for restraint in awards to U.K. executives.

— With assistance by Benjamin D Katz

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