Let’s hope the penny now drops for Jeff Fairburn, Persimmon’s chief executive and a man looking to scoop a bonus currently worth around £110m.
The moral to be drawn from the resignation of chairman Nicholas Wrigley should be simple: you don’t deserve the full whack, so best to forfeit a good chunk or make a hefty donation to charity.
Wrigley’s resignation, note, was not forced by Persimmon’s shareholders. Most fund managers don’t care about Fairburn’s good fortune because it comes with a share price that has performed spectacularly well since the incentive scheme was put in place in 2012.
Instead, Wrigley is embarrassed by the sheer size of the sums and his central role in making them possible. He – and pay committee chair Jonathan Davie, who is also going – should have put a cap on rewards. They failed to do so. They are resigning because they made a shocking error, or “omission” as they call it.
But their resignations may also be designed to encourage Fairburn to do the right thing. The same applies to group managing director, Dave Jenkinson, and finance director Mike Killoran. Together, the trio could be entitled to about £200m at the current share price, the fattest helpings from a scheme worth roughly £500m between Persimmon’s top 140 managers.
The first slug of shares becomes due on 31 December and outrage over these rewards, which have plainly been inflated by the government’s help-to-buy scheme, has been rising all year. Yet, two weeks from the trigger date for the first payments, the silence of the executives is deafening.
After Wrigley’s resignation, that position looks untenable. Fairburn & co might protest that giving to charity ought to be a private matter but, come on, Persimmon is a member of the FTSE 100 index and has a reputation to maintain. A “none of your business” stance is not going to work.
The departing Wrigley clearly sees the point. The housebuilding sector is at the centre of a political storm to the point where the chancellor has ordered an inquiry into allegations of “landbanking”, or the hoarding of the land to benefit from rising prices.
Firms, including Persimmon, protest their innocence but the whole industry has an image problem when there is an affordability crisis in housing. Mega-million pay-outs to lucky managers look appalling.
The incentive scheme itself was a creation of the times. Housebuilders’ share prices had been clobbered by recession and the financial crash. Investors wanted hard promises that firms could escape the traditional boom-to-bust cycle. Wrigley’s idea – encouraged by shareholders – was to set up a 10-year scheme that would be valuable to managers only if cash was returned to shareholders without piling up debt.
The plan has worked in the sense that Persimmon has returned £1.5bn so far, with more to follow. The share price has quadrupled. But it’s obvious to everybody that management skill has been only one factor in the success. Aside from help to buy, the revival of the mortgage market, with the encouragement of the Bank of England, has worked wonders for all housebuilders. That is the luck element – and the reason why rewards should have been capped.
Persimmon, for what it is worth, is a well-run company that has accelerated its building programme faster than most big rivals. Nor has it milked London’s house price boom. The York-based firm doesn’t operate in the south-east and the average selling price of its houses is about £210,000.
But those qualities don’t justify a £110m pay-out for the boss. While Persimmon’s shares have had a storming run, so have those of most competitors, including those who didn’t adopt a souped-up bonus culture. In retrospect, the cash-return goals were also too soft. It is odds-on that Persimmon will hit its supposedly stretching 2021 targets next year.
In other words, the rewards for executives have been massively inflated by lottery-like features. From a legal perspective, Persimmon can do nothing. Fairburn & co must decide how greedy they wish to be.
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