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Management is still overpaid in comparison to the value created for shareholders. The targets which trigger bonuses are too easy. The cash proportion of the bonuses is too high and conversely the share proportion too small.

If we compare Sandy Crombie’s potential annual rewards with those of Tim Breedon, his counterpart at Legal & General, we can see the extent of the problem.

Crombie hits his maximum bonus if the group delivers a return of 10.5% pa on shareholders’ funds. L & G has a much tougher target. Its shareholders must receive an annual return which is at least 80% of the total shareholder return (TSR) achieved by the FTSE 100 share index over the same period.

In 2005 the FTSE 100 TSR was 20.54%. L & G’s TSR was 16.24%. As this was just under the 80% threshold, Breedon did not make the maximum bonus. However, it was still a return on shareholders’ funds, using the Standard Life formula, of 17.65%. Breedon made £2.631 million. Crombie’s reward would be £2.624 million. So he makes 99.7% of Breedon’s money for 65% of his performance.

Cash makes up 50% of his total pay versus 41% for Breedon. Also, L & G requires its CEO to acquire L & G shares worth twice his/her annual salary. Standard Life has no policy. So Crombie’s interests diverge more from those of his shareholders.

Sandy Crombie is of course just the tip of the iceberg. If his pay is out of line, so is the pay of all the other Standard Lifers. That is seriously bad news for shareholders.

Update 10 June 2006

What does the flotation of Standard Life do for its with profits members?

Members are better off if the float occurs. This is true regardless of the value of any share allocation.

The capital position of the with profits fund is more secure. After the float, the fund has to operate as a “virtual company”, and be capital self sufficient. Its capital is insulated from the remainder of Standard Life’s businesses, and can only be used to assist them in the most extreme circumstances. Standard Life could only use the capital as a last resort to stave off insolvency. This would also be in the interests of the with profits policy holders.

Standard Life will have much less discretion in its management of the with profits fund. Mike Arnold, the independent expert, says in his report that it will be much more formulaic. This should give members more certainty about policy values.

The reorganisation incorporates Core Principles which entrench these changes. Only a court of law may sanction changes to the Core Principles. These are very important and valuable restraints on a management which has destroyed so much value in the with profits fund.

The excess capital in the with profits fund should be returned to policy holders as an addition to terminal bonuses. Its payment will depend on an assessment of the fund’s capital needs. It could provide a useful and welcome addition to policy payouts.

What is the outlook for the shares?

The Proposal for Members and Policyholders contains an estimated price range for the shares of £2.4 to £2.9. A current valuation measure is the ratio between the European Embedded Value of a long term insurance business and its market value. This measure makes £2.4/£2.9 look cheap in comparison to Prudential, Aviva and Legal & General. This is as it should be. Standard Life has fallen from grace – its credit ratings are lower, and it is too soon to judge the success of its recovery plans.

The company promises a progressive dividend policy, which will reflect the business’s long term earnings and cash flow. Progressive usually means a rising cash dividend regardless of economic conditions. Many companies have such a policy, including L & G. Its shares yield about 4.8% per annum pre-tax credit and it has recently paid out up to 70% of after tax profits. To be competitive, Standard Life’s shares should be yielding at least 5%. This would absorb about 50% of the 2005 after tax profits, and so could be afforded.

It looks as though Standard Life’s strategy is to sell the shares cheaply to raise the capital, and offer a competitive dividend yield to support the price. This should enable it to sell the shares to the money purchase shareholders, and give them some downside protection.

What’s the probability of the shares being bid up by an acquirer? Resolution Plc wanted to merge but was rebuffed. This was probably the right answer. Standard Life needs sales and marketing skills, while Resolution is a buyer and consolidator of unwanted life funds. No suitably qualified bidder has appeared. Aviva’s failed bid for Prudential tells us that the UK life assurance market does not attract much takeover activity. Sandy Crombie has said that the UK insurance regulations cause the industry to be overcapitalised, and so weaken the return on capital. This reduces the probability of a takeover.

At the moment, my personal take on this is that I shall hold the shares, see how they perform, take the dividend and support management actions which boost value.

Campaign update 23 April 2006

I received my share allocation and voting papers on Saturday. The likely value of any shares is a long way short of the losses we have taken on our policies.

However, I shall be voting to demutualise because I believe the company needs the capital, and it opens it up to greater scrutiny. Nevertheless, I believe there is a great deal at Standard Life that needs fixing. Most important is management pay. Standard Life’s practices are out of line with the best examples among quoted UK companies.

Raise-the-standard can continue as shareholders’ group after flotation. In the meantime, I shall be looking at the prospects for our shares. I would be interested in emails with your views. Please say if you are willing to allow them to be posted.

I have had the opportunity this last week to get over our views on both BBC TV and Radio. You can hear an interview with Paul Lewis talking to me on Money Box at 12.04 on Saturday 22 April- http://news.bbc.co.uk/1/hi/programmes/moneybox/4930574.stm

Here is the transcript on the BBC's Money Box website.

There are three excellent articles. Ian Cowie puts the planned float in the context of policy losses and management pay and can be read on: http://www.telegraph.co.uk/money/main.jhtml?xml=/money/2006/04/22/cmian22.xml

Jeff Prestridge looks at Standard's management, and its response to potential bidders - http://www.thisismoney.co.uk/news/article.html?
in_article_id=408462&in_page_id=19&in_author_id=3

Richard Dyson reviews what the float means to policy holders after the company becomes a plc - http://www.thisismoney.co.uk/investing-and-markets/article.html?
in_article_id=408461&in_page_id=3

Campaign update 11 April 2006

We have been campaigning since January for the best possible share deal for members at demutualisation. We have also lobbied for a management pay scheme which penalises actions injurious to members’ interests but rewards those that are beneficial.

Sandy Crombie and Standard Life decline to comment.

We have lobbied Mike Arnold, whose job is to protect members’ interests during demutualisation. We have asked the FSA about his powers – see Tiner letter.

The FSA responded, in form only. It answered none of my questions. Eventually, after I complained about its shabby treatment, it sent me an apology and a full answer. It said:

Arnold is not empowered to recommend alternative capital structures.
He cannot influence management pay.
The court can call the FSA and other parties to address it.
His main duty is to ensure that members are treated fairly
His report is available on Tuesday 18 April 2006

I have posted a scanned copy of the letter – FSA answer

So the final result will depend on members’ votes. We await with interest Standard Life's proposals

Campaign update 20 February 2006

I have written to Sandy Crombie as there are two areas where I believe members should still have their say.

We want the best possible shares at demutualisation. These are shares that are the safest for us, give us the best return, and a say in what happens at the company. The answer could be either convertible preference shares or a bond – please see Explanations.

Everything coming out of the company suggests that it will offer ordinary common shares but these are the highest risk and allow us to exert no control.

Compensation for managers and directors must be such that management’s own money is at risk. We are asking for a bonus scheme which requires managers to invest in the company. This means if the company doesn’t perform, management takes the first hit – please see Crombie letter.

These would be worthwhile because the latest research shows that such features actually increase the value of a company for its owners. Enhancing the value of Standard Life is important for all of us. The latest revelation about the costs of demutualisation shows that members need to demand a tough deal. Twelve months ago, the cost of demutualisation was about £100 million. It’s now about £250 million! Standard Life has poor controls.

What’s next?

If you back these ideas, please click on the attached email, copy, paste and send it to raisethestandard@btinternet.com . We will forward answers as a group petition to Standard Life.

Mike Hogan

Update 1 February 2006

This is a letter which I recently sent to Mike Arnold, after canvassing a representative sample of members. Mike Arnold is the consulting actuary, appointed by Standard Life, to safeguard members’ interests during demutualisation. Mike Arnold letter

Mike Arnold has answered me - his reply

When Sandy Crombie answers, I shall publish his letter here.

Richard Dyson has just done an investigative piece which shows what we were really up against in my campaign to get elected to the board - Is Standard Life fighting fair? http://www.thisismoney.co.uk/news/article.html?in_article_id=406573&in_page_id=2

Thank you very much, Richard

See how I used the Freedom of Information Act, and the services of the FOIA Centre, to dig out Standard's dirty tricks

E-mail reveals Standard Life ‘smeared’ critic

To contact us about any problems, send us an email on raisethestandard@btinternet.com