SANDELL Asset Management, the activist US investor with a 3.1 per cent stake in FirstGroup, has attacked the transport giant's board for allowing management to be "well rewarded for failure".

In an open letter to new FirstGroup chairman John McFarlane, Sandell says it will encourage a pay revolt at this month's annual meeting, citing a 209 per cent rise in the pay package of the group's chief executive over five years, the last three under Tim O'Toole. During that time FirstGroup shares have lost eight per cent of their value while a comparable peer group of stocks is up 231 per cent, Sandell claims.

Chief executive Tom Sandell says: "We are strong believers in pay for performance. We simply do not believe that a 94 per cent rise in remuneration package is deserved for Mr O'Toole's 2013/14 performance." He goes on: "Given that the incumbent management team has presided over operational and share price decline at FirstGroup, we were also surprised and disappointed to find that its members have been so well rewarded for failure."

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FirstGroup countered that the rise was actually 86 per cent, and due largely to a vesting of shares awarded to Mr O'Toole when he became chief executive three years ago. A spokesman said: "The other reason is that he has chosen to take his annual bonus for the first time in three years."

The New York-based hedge fund also questions the rejection of a Sandell nominee for non-executive director on a board where there is a "lack of sector expertise". Mr Sandell says he welcomes the appointment of three new non-executives but remains concerned at the lack of oversight of FirstGroup's US operations. "If sector expertise had been available on the board, we believe a number of poor strategic decisions taken over the past few years could have been avoided."

Mr Sandell has also made a formal complaint at a requirement by Mr McFarlane that Mr O'Toole should evaluate Sandell's proposed candidate for new non-executive director, who is said to be "highly qualified (with) considerable experience relevant to the FirstGroup US businesses".He said the move "appears to disregard the company's own published corporate governance policies".

FirstGroup said: "Sandell have contacted us to suggest that we appoint a further non-executive director to the Board. We will, of course, consider their suggestion in the appropriate way and in accordance with governance arrangements, noting of course that non-executive directors should act on behalf of and in the interests of all shareholders."

The board had been strengthened with the appointments of Warwick Brady, Drummond Hall and Imelda Walsh, and it believed it had the appropriate blend of skills and experience.

It said the multi-year recovery programme was making progress and would "enhance the resilience of the group, improve profitability and growth and increase returns to shareholders".

FirstGroup shares were down 3.5p at 126.6p.