Directors should be running companies for the benefit of their shareholders, not for themselves.
In my last couple of forays into company accounts, I've delved into some of the notes at the back, which many investors consider the most important part.
Today I'd like to take a break from the notes, and instead examine a part of a company's accounts that is often overlooked, but which can tell us a lot about the company's management -- the Remuneration Report, in which the benefits paid to the directors are listed.
To do that, I'll compare two companies, both of which have been in the Foolish headlights recently.
A well paid boss
First up is CybIT Holdings (LSE: CYH), whose Annual General Meeting recently came under the close scrutiny of AliceInWonder, who was a little disturbed by the amount of moolah that the directors (particularly the chief executive) trousered during the year.
CybIT does something called Telematics. What that is isn't really important for us here, but you can get the details from the company's web site, from where we can also get its annual reports. The final 2009 Annual Report isn't available as a PDF download yet, but you can view it interactively on the site -- though you'll have to give them your email address.
If we turn to page 31, we find the Remuneration Report, and probably the first thing you'll notice is the rather large rewards earned by chief executive R J Horsman, who pocketed a total of £530,531 for the year, including a bonus of £241,283. That stands out as being way over twice the amount paid to anyone else, with the financial director, K B Lawrence, in second place, going home with just £184,820.
A hefty total
We can see that the total directors' remuneration for 2008 came in at £1.04m, which was an increase of almost 15% on the previous year (which in turn was up 13% on the year before).
And if we flip to the next page, we find the share options that the directors have awarded themselves. If we add those up we see there's a total of over 2.3m options current, which, at today's share price of around 38p, are worth about £880,000.
If the company's shareholders are getting rich at the same time, this is all fine, but not a single penny in dividends has yet been paid. The total paid to directors in 2009 is about half of the company's pre-tax profit that year of £2.14m (see page 34), so the directors got about a third of everything (after all costs but before tax), with shareholders getting the other two thirds. And the chief exec's 2009 remuneration alone is equivalent to 5% of the company's total market cap of £10m.
On the other hand
Let's compare that with CCTV experts Indigo Vision Group (LSE: IND), a firm Fool favourite. The 2009 Annual Report can be downloaded from the company's web site, and when we peruse it, we find the remuneration of directors listed in the notes, on page 26 (the printed page -- it's PDF page 28).
Indigo Vision don't give us a full breakdown of individual directors' compensation, but we can see that the total paid to all directors for 2009 amounts to £681,000 (which isn't much more than Mr Horsman alone received over at CybIT), with the highest paid director receiving a modest £255,000 (including £10,000 in pension contributions).
Directors' share options are itemised on page 9, in the Directors' Report, and we can see a total of 336,500 options were outstanding at the end of the year, for a total value of £2.3m based on the share price of 680p.
To put all this into perspective, Indigo Vision is five times the size of CybIT, with a market cap of nearly £50m, pre-tax profit of £3.2m in 2009, and has already started paying dividends to its shareholders -- 5p per share this year, with 8p forecast for next (that's a very small yield, yes, but those first dividends have come sooner than expected, which does suggest the directors are focused on rewarding their shareholders).
Which is best?
So we have two companies, a £10m one rewarding its highest paid director with over half a million (but not a penny in dividends to shareholders), and a £50m company whose highest paid boss gets just half that, and which has started paying dividends. It's up to you to decide which one you think is being run with its shareholders' interests most at heart -- but one favourite Fool seems to have decided.
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