Royal Mail Executive Pay is Unacceptable, says Hobson

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THE WEEK: Morningstar columnist Rodney Hobson says the gap between corporate pay and performance is growing, despite protests from shareholders

The gap between corporate pay and performance is growing, despite the correspondingly growing level of protests from shareholders. Royal Mail (RMG) is the latest example but it is unfortunately only one in a long list. The more money you pay a director, the less incentive there is for the individual to work harder as they know they will get a generous payoff when they are caught out.

Royal Mail has been under fire for overpaying directors and we can see that the criticism was justified

Royal Mail has been under fire for overpaying directors and we can see that the criticism was justified. Annual profits are now forecast at £550 million, and although the board couldn’t bring itself to say so in the statement, that is at least £100 million down on expectations and £150 million down on last year.

As the warning was put out in the middle of Monday afternoon – someone on Twitter joked it was sent second class – one assumes that the directors were not on top of the business. Efficiency improvements are running at only 0.1% rather than the 2-3% target, which is quite some shortfall. Also, the decline in letters has been worse than expected, perhaps because the post is now delivered so late in the day thanks to those “productivity” savings.

The discrepancy between hope and reality is sufficiently large for shareholders to feel that it should not have come as a surprise to the board.

Perhaps attention was diverted to agreeing a payoff of nearly £1 million to the departing chief executive and a £6 million golden hello for the next one, payments that prompted shareholders to vote against the remuneration report, thus dislodging the chairman.

Royal Mail could try to fill the hole by raising postage charges but that would simply drive down the number of letters even faster. One can only hope the new chief can earn his £6 million and much more.

The shares slumped 18% on the day of the announcement and another 8% the following morning. The shares are in serious danger of falling below the 330p flotation price. Five years ago that was seen as a gross undervaluation. It now looks too much to pay, especially as this is one of the most heavily shorted stocks on the London exchange.