Rolls Royce boss Warren East's takeoff puts chief executive pay rows into perspective


Rolls Royce engines power many of the world's passenger planes (Source: Getty)

Rolls Royce boss Warren East has endured something of a rollercoaster ride since taking control of the British engineer two years ago, and so have investors in the company.

Shares climbed to 994p in April 2015 when East’s appointment was announced, but subsequently declined as markets absorbed the full extent of the new chief’s task at hand. By the time the former Arm CEO took over in July of that year, the stock had droppd to 824p, and following East’s first week in the job a profit warning pushed shares down to 728p.

The turbulence continued throughout 2015, and Rolls’ stock finally bottomed out at around 500p in January last year.

Since then, East’s turnaround plan has gradually convinced traders to get back in on the action. Yesterday’s 10 per cent jump in the value of the company was just reward for forecast-smashing profits, far better than expected cash flow, and decent progress in its determination to double the production of large engines used by civil aircraft.

Aviation guru Howard Wheeldon was gushing, agreeing with a statement that East “is a truly outstanding CEO”.

He added: “In the post Brexit world, we need Rolls-Royce to be strong, efficient and globally competitive. I have no doubt at all that this is exactly what Warren East and his team will achieve.”

While there is ample time for East and his new team of execs to disappoint, their progress so far is undeniably impressive. Moreover, the case of Rolls demonstrates the value of a strong CEO, and indeed the cost of not having one. Around £1.6bn was added onto the value of the company by yesterday’s stellar results. The aforementioned share price tumble and recovery represents £9bn being wiped off and then back on the value of the company during a period of just two years.

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Such numbers remind us why some top bosses are paid so handsomely for their work. East’s £916,000 bonus was slammed by critics just a few months ago, but now looks insignificant compared to the £4bn added to Rolls’ market cap since the payout was announced.

There will be more debate about chief exec pay this week (see tomorrow’s City A.M. for our coverage) and rightly so – it is a subject that requires scrutiny. This newspaper has always encouraged fiscal discipline at big public companies and applauded the rigorous attention paid to remuneration schemes by large investors and shareholder activists.

However, we have also argued that high salaries and bonuses are not a bad thing per se. On the contrary, they are fully justified when executives such as East deploy their talent and hard work to extract billions of pounds' worth of shareholder value and ensure Britain’s biggest companies can compete on the world stage.