The High Pay Centre’s annual review of FTSE 100 chief executive pay reveals that the largest increase last year was at Rolls-Royce (RR.): £13.6mn in 2023, compared with £3.8mn in 2022. This analysis is based on the “single figure of total remuneration” as mandated by government regulation and published in each company’s annual reports. While this method allows for like-for-like comparisons between companies, it can sometimes be misleading.
In the case of Rolls-Royce, chief executive Tufan Erginbilgiç’s 2023 single figure included compensation for the significant amount he left behind when transitioning from his previous role in private equity. The remuneration committee at Rolls-Royce positioned the value of this compensation at the lower end of a fair value range, amounting to £7.5mn, which he received in the form of Rolls-Royce shares. Half of these shares will be held until March 2027, while the other half until March 2028.
After deducting this buyout, Erginbilgiç’s underlying ‘single figure’ stands at £6.1mn, representing a 59% increase from the 2022 figure received by his predecessor, Warren East. East took the helm at Rolls-Royce in 2015 when the company was facing significant challenges, including losses of £4.6bn in 2016 and a dividend cut. Despite his efforts to streamline operations and secure emergency funding, the company continued to face hurdles, such as durability issues with its engines and the impact of the pandemic on the aviation industry.
East’s performance-related pay was intended to align his financial losses with those of shareholders, but it ended up exacerbating them. His share awards depreciated significantly, and he forfeited bonuses due to unmet performance conditions. Despite the challenges, East remained committed to the company’s turnaround efforts, which included increasing revenues in key sectors, restructuring business units, and making necessary staff reductions.
In 2023, Rolls-Royce implemented a new pay policy aimed at incentivizing executives to generate cash, improve margins, and reduce debt. This policy, which replaced annual bonuses and long-term share awards with a cash/share scheme, was instrumental in Erginbilgiç’s substantial pay increase. Since joining the company, Erginbilgiç has spearheaded a remarkable turnaround, with the share price nearly quintupling and the market value soaring from £8bn to over £40bn.
As East prepares to retain most of his shares until January 2025, the value of his Rolls-Royce shares has increased significantly, reflecting his dedication to the company over the years. Meanwhile, Erginbilgiç’s swift impact on the company’s performance has also been rewarded, showcasing the effectiveness of the new pay policy in driving results.
The story of Rolls-Royce’s executive pay highlights the complex interplay between performance, compensation, and shareholder value in the corporate world. As companies navigate challenges and opportunities, executive pay structures must evolve to align incentives with long-term success.