Jeff Fairburn, the £110m chief executive of Persimmon, will have reflected long and hard about how it looks to receive such an enormous personal windfall at a time when executive pay and housebuilders, with their share prices inflated by help-to-buy subsidies for homebuyers, are in the political spotlight.
He will have noted that Persimmon’s chairman, and the head of the remuneration committee, resigned last month out of shame or embarrassment. The duo conceded, in effect, that they made a colossal error when they designed the 2012 incentive without putting a cap on rewards. They may also have been trying to exert some moral pressure on Fairburn and his executive colleagues to give up some of the gains or make a hefty public donation to charity.
And here is Fairburn’s considered response: I’ll take the full whack, thanks, and, though I may give some to charity, that’s nobody’s business but my own.
The stance was expected, of course. But, please, spare us the bleat about how shareholders overwhelmingly approved the incentive scheme.
So what if they did? City fund managers will vote for (almost) anything that implies a higher share price, but directors are meant to be able to take a broader view of a company’s affairs. Persimmon is a FTSE 100 business that carries a small portion of the investments of most people saving for pensions in the UK. Closing your ears to the debate about boardroom pay shouldn’t be an option.
That is especially so when everybody can see that good luck played a huge role in inflating the value of the Persimmon’s share price, and thus the value of the incentives. Yes, Persimmon’s bosses still had to return £1.5bn to shareholders but the difficulty rating fell from “tricky” to “easy” once George Osborne unleashed help to buy, which is used in about half of the company’s transactions. The Bank of England’s push to ease the logjam in mortgage lending was also extremely helpful.
After the Persimmon shambles, one hopes boards will remember to impose caps on long-term incentive schemes. But a better response would be to abolish long-term incentive schemes, or LTIPs, altogether.
As argued here many times, LTIPs are a terrible way to measure executive performance. The value on the rewards is overly determined by the share price at the timing of the grant. Pay committees barely police the gaming of the system via share buy-backs. And, as Persimmon has demonstrated in spades, outside events introduce lottery-like features.
“We conclude that LTIPs should be phased out as soon as possible,” said the excellent report by the Commons business select committee last April. You will even find a few enlightened fund managers who share the view that LTIPs have failed to improve corporate performance one iota and are designed to spit out something whatever the weather.
Unfortunately, the government, despite Theresa May’s boasts about reforming corporate governance, then offered the most timid version of reform in its response to its own green paper. Quoted companies, it said, should “provide a clearer explanation in remuneration policies of the range of potential outcomes from complex, share-based incentive schemes”. In other words, carry on much as before.
Just get rid of LTIPs. Force remuneration committees to design schemes that don’t produce perverse outcomes. Persimmon is an extreme example, but the whole LTIP system is rotten.
City ministers hold a pointless portfolio
Another year, another City minister. Stephen Barclay, now moving to health, was in post for slightly less than seven months. He was the eighth person since 2010 to hold the position, formally known as economic secretary to the Treasury.
If the job is actually a non-job, why not admit as much and abolish the post? The City is hardly shy in making its views known to the Treasury and any self-respecting boss of a big bank would expect to be hauled in by the chancellor or the governor of the Bank of England, not by the City minister, in times of crisis.
Besides, why is it deemed necessary for the City to have its own point-person in number 11? Isn’t the Treasury supposed to managing the economy for everybody?
No time for bears
Albert Edwards of Société Générale is the City’s best-known bearish analyst and his annual January presentation is normally a standing-room-only affair. This year, however, there were seats to spare in a hall that holds 1,000 people or so.
The obvious conclusion: too many people feel obliged to join the current bull market and would rather not listen to prophets of doom. That’s worrying. Complacency usually sets in just before the bad stuff happens.
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