While public fury over executive pay has focused on larger corporations, far larger inbalances in remuneration can be found among smaller insurance companies. But is this the right way to look at it?

The Association of British Insurers (ABI) is virtually synonymous with attempts to crack down on executive pay. The body’s “red top” warnings advise fund managers responsible for billions of pounds of insurance money about corporate governance breaches in the quoted companies they invest in.

More than two-fifths of these warnings are believed to be over excessive boardroom pay, while the ABI has backed calls for non-executive directors to better control the salary and bonus packages of senior staff.

Surprisingly, the ABI does not take any particular interest in the pay of directors in the insurance industry, where it would perhaps have the greatest expertise on what should be suitable remuneration. An ABI spokesman says: “It’s not that we don’t do analysis of our own sector, we just do it across the board of business.”

The same message

However, Insurance Times has spoken to several analysts and sector experts who have responded with much the same message: executives at the bigger insurers are, at most, paid in line with companies of similar size, but there are question marks over the rewards at smaller listed groups. 

Investec analyst Kevin Ryan points to RSA among the big boys. Although it is less than three years since then-boss Andy Haste was criticised in the press for receiving a 14% rise in his total package to £2.33m when profit had fallen sharply, Ryan points out that only a “tiny number” of RSA executives receive more than £200,000.

“These people are running whole country divisions and are responsible for profit & loss accounts worth hundreds of squillions of pounds,” he says. “My sense is that they are not paid too much.”

Indeed, there might not even be enough on offer to keep hold of top talent. Ryan highights RSA finance director George Culmer’s move to Lloyds Banking Group. His £556,000 salary at RSA was boosted to £1.1bn with bonus and other benefits last year, but Culmer can expect far more when he leaves for taxpayer-owned Lloyds later in 2012.

A leading insurance industry figure concurs, but says that there can be severe discrepancies lower down the food chain: “The management in the large companies are rewarded in line with similar sized groups in other industries. But executive pay in smaller non-life insurers is out-of-kilter.”

The source claims that there are examples of these executives being paid “30, 40, 50%” more than peers running retailers and support services groups that have just about the same market capitalisation. 

“My argument is that management teams have not covered themselves in glory,” he says. “You only have to look at the share prices to know that shareholders don’t think they are worth it: they are trading close to book value.”

Particularly skilled managers

In essence, there are several small insurers, typically those with a gross written premium of less than £300m, where the management cannot prove that they are enhancing the price of their company’s stock. The value of these insurers is simply the value of their assets, suggesting that the executives are not wowing investors with growth plans.

However, a second industry expert argues that financial services groups need particularly skilled managers due to the complexities of their industries, so their pay will naturally be higher than the boss of a high street fashion chain or a group specialising in waste management.

That smaller insurance executives seem to be paid too much in relation to bigger rivals might just be a case of incorrectly perceiving the skills needed to run them are less, and a presumption that a FTSE 100 boss would automatically get more than someone running an insurer on the Alternative Investment Market. Whatever the size of the group, management needs to be incentivised with significant bonus packages.

“To get top quality people there is a market rate, whether the companies write £300m of premiums or £1bn,” says this expert. “Where is the rule that states that boardroom remuneration should be related to the size of the company?”

Too much attention to pay

Some analysts even question whether too much attention is being paid to executive pay when the ABI’s members should be focusing purely on whether that company will grow in value. RBC Capital Market analyst Gordon Aitken says: “In terms of money these companies are making, it [executive rewards] are a small amount that doesn’t effect the investment case.”

Also, most remuneration packages are misleading. Share options might be worth hundreds of thousands of pounds, but executives will only get their hands on the rewards should the share price respond to their attempts to improve operational performance and reach strategic goals.

The truth is that if those FTSE share prices do increase when the financial crisis eventually ends, far fewer investors, politicians and journalists will take notice of remuneration packages no matter how obscene they might still seem. And insurance executives of both big and small companies will be able to brush aside the few critics who remain.