Ceo Pay and Public Services

PSIRU University of Greenwich www.psiru.org

CEO PAY AND PUBLIC SERVICES
By
Jane Lethbridge

1 May 2014

PUBLIC SERVICES INTERNATIONAL RESEARCH UNIT (PSIRU), Business Faculty, University of Greenwich, London, UK www.psiru.org Researchers: Jane Lethbridge (Director), David Hall, Emanuele Lobina, Prof. Steve Thomas, Sandra van Niekerk. PSIRU works with Public Services International (PSI), European Federation of Public Services Unions (EPSU), national public sector trade unions, social movements and alliances, NGOs and some European and international institutions

CEO PAY AND PUBLIC SERVICES

As a result of austerity policies, public sector workers in Europe have had wage cuts, reductions in benefits and are expected to work longer before they can claim their pensions. At the same time, governments have continued to privatise and outsource public services to multinational companies. A growing number of for-profit companies provide public services and are becoming increasingly dependent on public contracts for their profits. Attention has also focused recently on growing inequalities in income in Europe, with company CEOs earning many times more, often 100+ times more, than workers on an average wage.

This article looks at the pay of CEOs of companies contracted to provide public services, paid for by the tax payer. Nine multinational companies have been chosen: Capita; Serco; G4S; ISS; Sodexo, E.ON; Veolia; Suez Environnement. All are dependent on public contracts for part of their profits.

Table 1: Companies, revenues and public contracts

Company / Revenues / Profits/ Operating income [1] / Public contracts as % of revenues
Capita [2] / £3.851m / €516.9m (underlying operating income) / 48%
Serco [3] / £4.9 billion / £314 million / Est. 80% + for public/ government sectors
G4S [4] / £7.5 billion / £56m (PBITA) [5] / 27% government + 7% private energy & utilities = 34%
ISS [6] / DKK 77,644m / DKK 4,388m / 25% +
Sodexo [7] / €16 billion / €853m / 54%
E.ON [8] / €122,450m / €9,315m (EBITDA) [9] / At least 50%
Veolia (2013) [10] / €22,315m / €490.5m (operating income) / At least 50%
Suez Environnement (2013) [11] / €15,101m / €1,145m (operating income) / At least 50%

The expansion of Capita and Serco started in the 1980s/90s when the UK government started to contract out public services. They are now global companies. At least 48% of Capita’s revenues come from public sector contracts. Serco has over 80% revenues generated by the public sector. This makes both companies dependent on tax payer money. A recent UK National Audit Office (NAO) report found that Capita has only paid £56 million in corporation tax and Serco £25 million. [12] The NAO also calculated the profit that companies made on contracts with government/ public sector. The public sector profit margins for Serco appeared to be between 0 per cent and 9 per cent,[13] and between 1 per cent and 10 per cent for Capita. [14]

G4S, ISS and Sodexo started by providing facilities management and other services to the private sector but in the last twenty years, they have taken over an increasing number of public contracts. Revenue and profits of this group of MNCs are increasingly dependent on public contracts and public-private partnerships. G4S received 34%, Sodexo 54% and ISS received at least 25% of its revenues from public contracts. G4S did not paid any corporation tax in the UK (2012/3) and made an overall loss on some of its public sector contracts last year, giving an overall return ranging from -8 per cent to 16 per cent.[15]

E-ON, Veolia and Suez Environnement have all profited from the privatisation of utilities and now provide public services such as energy, waste management and water in a variety of contractual arrangements, including concessions, public-private partnerships. At least half of their revenues come from providing water, energy and waste management services to the public sector.

Table 2: CEO pay, profits and public contracts

Company / CEO basic
Pay / Bonuses
Perform-
ance related / Pension contributions / Allowances / benefits / Total
remuneration
Capita (UK)
(2013) Paul Pindar / £390,000 / £585,000 / £19,500 / £16,327 / £1,010,825
Serco (UK)
(2012)
Christopher Hyman / £744,500 / £812,250 / £595,466 / 319,950 / £2,512,309
G4S (UK)
Ashley
Almanza *
(2014) only paid as CEO from 1 June 2013 / £600,000 (Actual annual base salary is £850,000) / £648,000 / £150,000 / £61,056 / £1, 459,056
ISS (Denmark)
(2013) Jeff Gravenhorst / DKK 7,901,000 / DKK
4,600,000 / - / - / DKK
12,500,000
Sodexo (France) (2013) Michel Landel [16] / €933,400m / €1,027.295 / - / €2,400 / €1,963,095
E.On (Germany) (2013) Johannes Teysson [17] / €1,240,000 / €1,759,739 / - / €21,458 / €3,021,197
Veolia (France) (2013)
Antoine Frérot [18] / €900,000 / €887,000 / - / €2,030 / €1,862,000
Suez Environnement (France) (2013)
Jean-Louis Chaussade [19] / €750,000 / €736,790 / - / €15,459 / €1,502,249

The total pay (without shares) for a CEO of any one of this group of companies ranges from over £1 million (€1,218,140) to almost £3 million (€3,650,730). If share options are included the totals are over £2.5 million (€ 3,039,430).

Capita

Capita CEO, Paul Pindar, with a total pay package of over a £1 million, was insensitive when dealing with employee pay. In 2012, his pay increased by 20% but Capita IT employees pay was frozen. In 2013-14, 70% of employee pay continues to be frozen. An indication of the gap between CEO pay and employee pay can be seen in 2010, when the CEO was paid £14,000 / week and staff were striking for a one percent hourly increase to £6.42. [20] In February 2014, Paul Pindar retired and immediately took up a post with 3i, a private equity company.

Serco

Serco CEO, Christopher Hyman, resigned as a result of several scandals facing the company, which were damaging the reputation of the company and affecting future government contracts. His payoff package consisted of a year’s basic salary plus benefits, which are worth £1.1 million. In addition he was given a pension fund worth £2.2 million, with an annual pension of £128,000 per year. [21] He had 917,000 Serco shares, worth £5.1 million. The pay-off was paid in the light of accusations that the company fraudulently claimed for electronic tagging for prisoners, failed to provide adequate and humane services in prisons and detention centres and failed to fulfil a contract for ‘out-of-hours’ healthcare services.

The new CEO, Rupert Soames, was appointed on an annual salary of £850,000, with a pension allowance of 30% of this salary. His bonus will be between 75% and 150% of base salary respectively and will be linked to the achievement of financial and non-financial targets.[22] In addition Serco will be buying out the incentive awards that he will be forfeiting at Aggreko.[23]

The poor annual performance of the company, which has affected the reputation of the company, is beginning to impact on its financial position. [24] Serco has started to report a deficit. In April 2014 the company announced plans for raising £170 million from shareholders and in the same month, the finance director resigned.[25] The new CEO is expected to restructure the company. Although the company is in a difficult financial position, this has not had an impact either on the pay of the previous CEO or the new CEO.

G4S

Another company that shows there is no link between CEO performance and pay is G4S. The G4S CEO, Nick Bowles, resigned in 2013 following the UK government investigation into G4S overcharging for tagged offenders and the failure to provide security services for the 2012 Olympics. He received a pay-off worth £1.2 million. This is equivalent to what he would have received for 12 months salary (£830,000, a £332,000 pension allowance, and a £20,000 car allowance). He has a £9.5m pension fund and G4S shares worth nearly £5.5m.[26] The pay-off was not taxed. In addition, Nick Bowles also received non-cash benefits of £1,892 (medical insurance) and a gift (valued at £12,890 exclusive of taxes) in recognition of his length of service. [27]

Ashley Almanza is the CEO who replaced Nick Bowles and was immediately paid £1.46m in 2013, which was 23 per cent higher than the salary and benefits paid to his predecessor, in 2012. He received a bonus of £648,000 for 2013. In April 2014, shareholders started to criticise the level of remuneration when the company had still not recovered from the scandals of the previous year. [28]

For all three CEOs who have left Capita, Serco and G4S, the high pay and benefits levels have been paid even though the companies have all failed in some aspects of the quality of service and contract delivery. In the case of both Serco and G4S, the companies are still under investigation by the Serious Fraud Squad in the UK. Although the UK government has agreed that G4S can start to bid for new contracts, Serco has not yet been allowed to bid.

Companies based in Denmark, Germany and France

Capita, Serco and G4S all have headquarters in the UK. Five companies with headquarters in Denmark, Germany and France have similarly high levels of CEO remuneration. As global service companies, ISS has at least 25% and Sodexo 54% of revenues/ profits originating from public sector contracts. Utilities companies such as E.ON, Veolia, and Suez Environnement are estimated to have about 50% of revenues/ profits from the provision of energy, water and waste management to tax payers.

CEO pay does not reflect the performance of these companies that deliver public services for part of their profits. At a time when the value of the pay and benefits received by public sector workers is being reduced, with no prospects of any increases in future, the focus of attention should fall on the pay of CEO’s, who benefit from public sector contracts. When public sector workers are accused of being better paid than the private sector, there is no acknowledgement of how the CEOs of companies providing outsourced public services are extremely highly paid, partly funded through tax payers money. When public sector workers are expected to work harder, subject to performance targets, the CEO of outsourced companies are not subject to effective performance monitoring and some have received large payoffs for performance failures.

2 May 2014 Page 2 of 5

[1] Operating Income - Profit after taking out operating expenses (goods sold or wages) and depreciation.

[2] Capita (2013) Annual Report http://investors.capita.co.uk/~/media/Files/C/Capita-IR/Annual%20Reports/Capita_AR2013%20interactive.pdf

[3] Serco (2013) Annual Report 2013 http://www.serco.com/Images/Serco_AR2013_tcm3-44453.pdf

[4] G4S (2013) Annual Report 2013 http://www.g4s.com/~/media/3A387C7DC35049C6950D738F6AEBDB88.ashx

[5] PBITA Profit before Interest, tax and amortisation

[6] ISS (2013) Annual Report 2013 http://www.euroinvestor.dk/pdf/cse/2014/03/12721970/ISS%20Annual%20Report%202013.pdf

[7] Sodexho Annual report 2011

[8] E.ON (2013) Annual Report https://www.eon.com/en/about-us/publications/annual-report.html

[9] EBITDA Earnings before Interest Tax, Depreciation and Amortisation

[10] Veolia (2013) A Operating and Financial Review Consolidated Financial Statements for the year ended December 31, 2013 http://www.finance.veolia.com/docs/Rapport-Gestion-decembre-2013-17-03-US_1.pdf

[11] Suez Environnement (2013) Reference document www.suezenvironnement.com

[12] NAO (2013) The role of major contractors in the delivery of public services report for PAC p.42-43

[13] NAO (2013) The role of major contractors in the delivery of public services P.39 (Serco)

[14] NAO (2013) The role of major contractors in the delivery of public services P.37 (Capita)

[15] NAO (2013) The role of major contractors in the delivery of public services p.38(G4S)

[16] http://investing.businessweek.com/research/stocks/people/person.asp?personId=327974&ticker=SDXAY

[17] http://investing.businessweek.com/research/stocks/people/person.asp?personId=942960&ticker=EOAN:GR

[18] http://investing.businessweek.com/research/stocks/people/person.asp?personId=1550921&ticker=VIE:FP

[19] http://investing.businessweek.com/research/stocks/people/person.asp?personId=4787509&ticker=SZEVF

[20] Kunert P. (2013) CEO of bloated outsourcing firm Capita quits after 26 years 18th November 2013 10:14

http://www.channelregister.co.uk/2013/11/18/capita_pinder/

[21] The Independent (2013) Serco chief resigns in fight to keep government contracts

http://www.independent.co.uk/news/business/news/serco-chief-resigns-in-fight-to-keep-government-contracts-8905233.html

[22] http://www.serco.com/media/pressreleases/sercoappointsrupertsoames.asp

[23] http://www.serco.com/media/pressreleases/sercoappointsrupertsoames.asp

[24] http://www.ft.com/cms/s/0/0d08bfae-c3f6-11e3-b2c3-00144feabdc0.html#axzz30MCu2iNT

[25] Robinson D. (2014) Serco finance chief to quit as group puts scandal behind it Financial Times 16 March 2014 http://www.ft.com/cms/s/0/c1341a42-ad07-11e3-8ba3-00144feab7de.html#axzz30ZhMyiEv

[26] The Guardian (2013) G4S Nick Bowles quits 21 May 2013 http://www.theguardian.com/business/2013/may/21/g4s-nick-buckles-quits

[27] G4S (2013) Annual Report p.76

[28] Powley T. & Oakley D. (2014) G4S under fire over chief’s payFinancial Times 14 April 2014