Pay Protest at FTSE Dividend Favorite

LONDON -- When is an apology not an apology? When it lacks honest contrition. This is easily spotted, because bogus apologies usually begin, "I'm sorry you feel that way, but..."

Aviva backs down
For me, the only apology worth having is one that admits fault and includes a promise to do better. Hence, I carefully scanned today's announcement from insurance Goliath Aviva (NYSE: AV  ) on its latest pay spat with its owners.

Following the publication of Aviva's remuneration report on March 21, Aviva admitted that "a number of [shareholders] have voiced concerns about some elements of the report."

The U.K.'s largest insurer then goes on to say, "These concerns have mainly centred on how we structure the compensation paid when we recruit executive directors and whether overall levels of remuneration, driven by the operating performance in 2011, appropriately reflect changes in shareholder value through the year."

In plain English, this translates as, "We pay new directors too generously, and given the group's weak results in 2011, we've also overpaid other board members."

Of course, Aviva's remuneration committee "believe that the proposed levels of remuneration were appropriate reward for Aviva's operating performance and strategic progress in 2011, as well as for attracting and retaining key executive directors, and accordingly were in shareholders' long-term interests."

In other words: "We hear you, but we don't agree."

The committee then backs down somewhat by stating:

However, reflecting on shareholder feedback, the Remuneration Committee has agreed to review how Aviva will compensate future joining executives for the loss of entitlement from their previous role. In addition, the Committee has accepted Mr Moss's decision not to accept the salary increase granted to him in 2012. We will continue to consult with shareholders on executive remuneration.

Translation: "We admit the golden handshakes given to new board members have gotten way out of line. We'll review these, but we won't promise anything. Meanwhile, our chief executive, Andrew Moss, has diplomatically declined his 4.6% pay rise, so as to keep his basic pay under the headline-grabbing figure of 1 million pounds."

Scott Wheway, chairman of Aviva's remuneration committee, ends by saying:

We take the views of our shareholders very seriously. I am disappointed that we haven't done that as well as we should have on this occasion. A number of shareholders have indicated that they would like to see a different approach to the way we compensate senior directors on recruitment and an even closer correlation between our pay packages and shareholder returns. Having listened to them, we have sought to address their concerns and will continue to engage with them on this matter.

That almost sounds like a genuine apology to me.

Aviva: pay versus payouts
With 43 million customers and more than 36,000 workers worldwide, Aviva is a member of the FTSE 100 (INDEX: ^FTSE  ) , Britain's blue-chip elite. Hence, you'd expect its directors to be among the highest-paid people in British business.

Then again, these directors are nothing more than agents for shareholders, who are Aviva's ultimate owners. So how does executive pay compare to shareholder payouts at the insurer? To find out, I dug through Aviva's annual reports going back to 2001.

Disappointing dividend history
Let's start with shareholder dividends -- the cash returns paid out each year to Aviva's owners. Here they are:

Year

Dividend per Share (pence)

Change

2001

38

N/A

2002

23

(39%)

2003

24.15

5%

2004

25.36

5%

2005

27.27

8%

2006

30

10%

2007

33

10%

2008

33

0%

2009

24

(27%)

2010

25.5

6%

2011

26

2%

As you can see, Aviva's dividend payouts have risen and fallen in line with stock markets as a whole. After peaking in the early 2000s, Aviva's dividend was slashed by 39% in 2002 -- during the stock market crash of 2000 to 2003.

Aviva's cash payout then rose steadily until Mr. Market's next heart attack. In the depths of the global financial crash of 2007 to 2009, the FTSE 100 firm once again sliced its dividend, cutting it by more than a quarter in 2009.

As a result, Aviva's latest dividend is 26 pence a share, which is almost a third lower than it was a decade earlier. Frankly, that is a truly terrible performance, even considering the stock market's zigzags of the past 10 years.

Pumping up pay
As dividend payouts have headed down, what has happened to executive pay at Aviva?

Rather than looking solely at the CEO's earnings or even the remuneration of the PLC board, I dug into Aviva's annual accounts for a broader figure: senior executives' remuneration.

Here's how "total compensation paid to key management personnel" has risen since 2007, when Andrew Moss was appointed Aviva's chief executive:

Year

Pay (millions of pounds)

Change

2007

60

N/A

2008

53

(12%)

2009

61

15%

2010

66

8%

2011

65

(2%)

As you can see, leaders' pay at Aviva tumbled in 2008, dropping 12% to 53 million pounds from 60 million pounds in 2007. It then rebounded by 15% to 61 million pounds in 2009 and leapt a further 8% in 2010. However, in 2011 leaders' pay at Aviva actually fell by 2%. Broadly speaking, this figure has trended in the same direction as the stock market since 2007.

What's more, in 2009 and 2010 Aviva's executive directors froze their basic salaries for two years in a row. Then again, thanks to a host of different bonuses, incentive schemes, share awards, and option grants, plus generous final-salary pensions, basic pay is a mere fraction of the generous remuneration packages handed out to Aviva's top managers.

Anyway, the upshot is that since the appointment of boss Andrew Moss, Aviva has lifted its payments to key staff from 60 million pounds to 65 million pounds -- a rise of 8% -- while chopping its dividend from 33 pence to 26 pence -- a cut of 21%.

That doesn't seem right to me.

Ultra-cheap shares
Based on the usual market measures, Aviva's shares look very cheap today, making them a favorite among value investors and dividend seekers.

As I write, Aviva shares trade at 311.8 pence, down 4.9 pence since Monday's open and valuing the group at over 9 billion pounds. At this price, they trade on a forward price-to-earnings ratio of just 5.6 while offering a prospective dividend yield of 8.5%, covered 2.1 times.

You could say that these, not the finer points of its executive pay, are Aviva's most important figures. But then again, perhaps the market is applying the cheap rating because the group's managers might be focused on their own pay, rather than the income of ordinary shareholders.

As always with shares, there are pros and cons to weigh up -- and the decision to own Aviva remains entirely yours.

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Cliff does not own Aviva shares. The Motley Fool has a disclosure policy.
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