FirstGroup’s chief executive will feel the wrath of shareholders this week over a deal that will nearly double his remuneration package, writes Kristy Dorsey
IT’S the issue that just will not go away. After the latest shareholder revolt over the pay package for Burberry boss Christopher Bailey, attention will turn this week on Tim O’Toole, chief executive of transport group FirstGroup.
The board will be forced to defend a near doubling of his remuneration in a year when shareholders missed out on dividend payments and the company has had to rebuild its balance sheet.
A significant minority of investors are expected to vote against O’Toole’s deal at the group’s annual meeting on Wednesday in Aberdeen. The £1.9 million package, up from £1.1m previously, includes an annual bonus of £600,000 – more than half of the maximum entitlement of 120 per cent of his basic salary of £846,000.
The vote follows a year in which FirstGroup was forced to launch a deeply discounted rights issue to defend its credit rating. It also reneged on its promise to return cash to shareholders with a dividend of up to £50m.
The decision to scrap the dividend was based on “the current stage of the turnaround programmes and our commitment to our capital programme”.
The group is looking to improve its UK bus business as well as its underperforming school bus operation in the United States.
Commenting in last week’s first-quarter trading update, O’Toole insisted that the bus and rail group’s turnaround strategy is “on track”.
“Across the group we are confident that we have the right programmes under way to build on our market-leading positions and improve performance to create sustainable value over the medium term and beyond,” he said.
However, many remain unconvinced that this merits the leap in O’Toole’s pay package.
The company has come under fire from Thomas Sandell, the US activist investor who owns 3.1 per cent of FirstGroup. He has written to FirstGroup chairman John McFarlane to complain that O’Toole’s pay package has ballooned by 209 per cent in the past five years even though FirstGroup shares have underperformed the sector by 239 per cent in that same period.
“We strongly believe that management’s and shareholders’ interests should be aligned and that properly structured rewards can incentivise management teams,” Sandell wrote. “We simply do not believe that a 94 per cent rise in his remuneration package is deserved for Mr O’Toole’s 2013-14 performance.”
Sandell has previously pushed for a break-up of FirstGroup, including the spin-off of its US school bus and public transport business and the sale of its Greyhound long-distance bus operation. FirstGroup rejected those demands at the end of last year.
It initiated its own turnaround programme in May 2013 after angering investors by launching a £615m rights issue at a 62 per cent discount to the prevailing price. Martin Gilbert quit as chairman in the aftermath of the cash call, triggering a six-month search for a replacement that ended in December with the appointment of McFarlane.
But Sandell isn’t the only one concerned about O’Toole’s pay package, as a number of investor advisory bodies have raised questions as well.
The Institutional Voting Information Service (IVIS) has issued its so-called “amber top” warning, which highlights a “significant issue to be considered” by shareholders. US corporate governance adviser ISS says the group’s remuneration report is “not without concern”, though it is not advising investors to oppose the report.
PIRC, the Pensions & Investment Research Consultants, has advised shareholders to reject the remuneration policy. It says the total potential awards under all of FirstGroup’s incentive schemes are “excessive”.
FirstGroup has defended the incentive payments as “commensurate” with the company’s progress, which has included a return to profitability in the latest financial year.
“Our executive directors saw their basic pay frozen in 2013-14, as it has been for the past two years, and received just over half of their potential bonus,” FirstGroup said when the pay packages were revealed last month.
“This is the first annual bonus that Tim O’Toole has taken since he became CEO and reflects the progress the group has made. As we continue to work through our transformation programmes, we are encouraged by progress towards our medium-term targets so far, although there remains a significant amount of work ahead.”
O’Toole told Scotland on Sunday that Sandell’s comments “do not withstand scrutiny” and insisted the company’s strategy was the preferred option. He said McFarlane would be writing to Sandell.
Last week’s trading update revealed a 4 per cent rise in prices at the First Student division. The group operates a fleet of 49,000 yellow school buses, making it the biggest provider of student transportation in North America.
Rail revenues rose by a “robust” 6.6 per cent.