At the AGM in December 2002, two shareholders queried the level of director's remuneration in this relatively small company. For example the chief executive earned almost a million pounds in the previous year, and the average executive directors total remuneration went up by 50% when pre-tax profits only rose by 25% (and most of that was due to house price rises which was hardly a result of good management skills or effort).

The response from the Chairman (then John McCarthy) was that they were based on comparables as reported by consultants to the remuneration committee. The writer investigated this claim and subsequently wrote the following letter to Sir George Young, head of the remuneration committee (and owner of all of 2000 shares at that time).

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I am glad to hear that the Remuneration Committee have reviewed the existing bonus arrangements, although you don’t say whether any decision was made to revise those arrangements.

As regards the point you make about the comparable figures at Persimmon, I have looked into this and if you examine the figures below, taken from the last Annual Report of each company, I think you will see that these are not comparable.  Persimmon is a very much larger company than McCarthy & Stone, and yet the remuneration of the CEO and the average remuneration of all directors are only slightly higher.  

Figures above exclude pension benefits and share option grants and realizations.

In summary, the business of Persimmon is about 8 times larger in revenue terms, and 2 times larger in profit terms.  However the pay of the CEO was only 15% higher, and the average pay of all directors was only 22% higher.    

Although I pointed out that I believe salary packages are generally too high in the construction sector, even on the above figures McCarthy & Stone are paying higher than the market rate if you consider that Persimmon represents the market norm. 

I would suggest in any case that if you look at comparable construction companies, for example, Westbury or Crest Nicholson which are the closest ones I could find on a quick search, then the remuneration packages are substantially lower.   The following are some figures for them: 

Westbury and Crest Nicholson have comparable profits to McCarthy & Stone, although substantially more turnover, but the pay of their CEOs is about half that of Mr Lovelock. Maybe you should ask your remuneration consultants to look again at the comparable numbers! 

I haven’t bothered looking at the comparable numbers in other sectors, but I don’t think I would have any difficulty finding a lot of similar size businesses who were paying their CEOs a lot less. 

Yours sincerely

 Roger W. Lawson

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McCarthy & Stone - Written December 2003. Note that there are good aspects to the company's bonus scheme because the recipients are forced to use some of it to acquire shares which must be held for a minimum period of time, but the lack of explanation on how it operates, ie. the criteria for awards, is of major concern. The lack of such disclosure is contrary to ABI guidelines for example.

In the 2003 Annual Report, remuneration of most of the directors had slightly fallen, even though profits and turnover had risen. However there was still no disclosure of the bonus scheme details and this raised some negative comments in the current issue of Analyst magazine.  In addition the report stated "The Remuneration Committee's objective is to pay salaries at the median compared to companies in the sector of comparable size and complexity of operation and to provide overall packages at the upper quartile level, subject to the achievement of challenging performance targets". This appears to allow plenty of discretion to pay excessive amounts.

In addition the report disclosed that the company contains a "poison pill" in that two directors, including the CEO/Chairman, can resign and claim two years salary if there is a takeover (not unlikely according to most commentators and Mr McCarthy already announced such a bid but later withdrew). A very expensive contractual arrangement and clearly not to the advantage of shareholders.

When these matters were raised at the AGM in December 2003, the answer to the request for the bonus scheme details was that this will be considered for future reports (however it also transpired that the actual bonus rates are not set until well into the financial year on which they are to be paid which clearly makes the targets easier to achieve). The "poison pill" was apparently agreed by the former chairman in response to requests from the directors concerned.

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McCarthy & Stone - Written November 2004

In the year ending August 2004, the total remuneration of the directors again fell slightly, although profits again rose. In addition some details of the bonus scheme details were disclosed in the Annual Report so it is good to see that shareholder concerns are being addressed. However, several breaches of corporate governance codes were disclosed, including the following:

a - The current Chief Executive and Chairman, Keith Lovelock, is to hand over his responsibilities as Chief Executive, but will continue to act as executive Chairman for a time, plus subsequently become non-executive Chairman. The Combined Code recommends against a former Chief Executive becoming Chairman on the grounds of lack of independence.

b - Two directors still have notice periods of more than one year.