Direct Line defends top execs’ pay deal

Direct Line Group could face a backlash over its multimillion-pound pay packages to its two top executives, an analyst predicted.

However, the company has defended the remuneration levels, arguing they are below the average for its peer group, and are based on the executives meeting robust financial targets.

According to the prospectus for Direct Line’s forthcoming initial public offering on the London Stock Exchange, chief executive Paul Geddes could be entitled to up to £3.81m a year, and chief financial officer John Reizenstein to £2.2m.

The amounts are a combination of base salaries performance-related incentives and other benefits. Some 75% of the total is performance related, and based on the group reaching its recently stated targets of a 98% combined ratio by 2013 and return on tangible equity of 15%.

Analysts suggest that Direct Line could come under fire for the pay awards. This is because even after flotation it will still be majority-owned by The Royal Bank of Scotland (RBS), which is owned by taxpayers following its 2009 bail-out.

Also, some consider the stated combined ratio and return on equity targets to be relatively easily achievable, making it difficult to justify the rewards on offer.

Shore Capital analyst Eamonn Flanagan described the targets as “not terribly stretching”, particularly because they relate only to continuing business, and therefore exclude the effects of business in run-off.

He also thinks the rewards are generous because some of Direct Line’s future performance could be driven by releasing reserves that were paid for indirectly by the taxpayer through the RBS ownership.

“A bonus structure based on pure year underwriting targets would have been interesting - and challenging,” Flanagan said.

A Direct Line Group spokesman defended the pay levels. “Remuneration is benchmarked by an independent executive remuneration consultancy against the FTSE 31-100. On both this metric and benchmarked to other large insurance company remuneration, executive compensation is below the median.”

Commenting on the robustness of the targets, the spokesman said: “Both the remuneration committees of Direct Line Group and RBS Group believe the targets are stretching.

“For the CEO’s long-term performance shares to vest in full, Direct Line Group will have had to deliver an average return on tangible equity of more than 17% over three years, and be in the top 20% of FTSE 350 companies in terms of total shareholder return. Shareholders ought to be absolutely delighted with a performance like that.”