Shed no tears for Rakesh Kapoor, the chief executive of Reckitt Benckiser who has had £11.2m deducted from his 2017 pay package. He still earned £12.5m, owns shares in the Dettol-to-Durex firm worth £40m and this year is chasing a £22.7m maximum jackpot. He’ll get along fine. No need for a Nurofen.
Reckitt has too often over the years found itself defending the indefensible – remember the £90m for Bart Becht, Kapoor’s predecessor, in 2010 – so perhaps deserves half a cheer for remembering that discretion is allowed when a mechanical pay formula spits out an obviously silly number.
In this case, Kapoor scored top marks under the terms of his 2015-17 long-term incentive plan, or LTIP. Reckitt had to achieve growth in earnings per share, ignoring the effects of acquisitions, of 10%. It achieved 11.5%. In practice, pretending that everything went swimmingly would have fooled nobody.
Reckitt’s share price has fallen by a quarter since last summer as the market has digested a cyber-attack, a profits warning and the acquisition of a baby milk business where the $18bn price struck many observers as far too rich. In the circumstances, handing Kapoor his full LTIP whack of £22.4m would have risked a BP-style revolt by investors. Cutting the figure in half to acknowledge “the shareholder experience”, in the committee’s coy phrase, reduces the risk of a riot.
In truth, though, Reckitt’s pay committee deserves little credit. It has failed to ask the obvious question: if an LTIP scheme tied solely to earnings per share has been exposed as a dud, why is it still being used?
This is the second year in a row that Kapoor’s pay has had to be adjusted downwards to reflect factors that the model could not compute. Last year the boss was obliged to make a gesture to acknowledge a safety scandal with a Reckitt product in South Korea linked to the death of 92 people. Kapoor, though not in charge when the scandal happened, was docked 40% but still collected £14m.
Reckitt could have concluded at the time that a one-eyed focus on earnings per share is a poor way to measure performance. It is also the true that investment managers themselves, weary of an executive pay system where luck and timing often play a greater role than skill and hard work, are increasingly open to ditching LTIPs.
The new chair of Reckitt’s pay committee, Mary Harris, should order a review. Even by the lavish standards of large FTSE 100 companies, Kapoor is highly paid. And when the formula for calculating his rewards can’t withstand contact with common sense, it’s time to design a better system.
Grim outlook for Conviviality
“The board believe that shareholders in the company will receive little-to-nil value.” That’s the stark reality for investors in Conviviality, owner of the Bargain Booze and Wine Rack chains. An intended £125m rescue has flopped and a sale of assets is under way. Matthew Clark, the well-established wholesale distribution business, will probably attract interest but the rest is anybody’s guess.
At the start of this month Conviviality was worth £550m, making the speed of this collapse spectacular. The causes plainly run deeper than a £30m tax bill that the company failed to spot. The next announcement – one trusts – will come from the Financial Reporting Council and will promise to get to the bottom of what happened.
Is Shire going the way of GKN?
Just as the GKN/Melrose excitement draws to a close on Thursday, here comes a bid for a bigger FTSE 100 company. The business secretary, Greg Clark, can relax, though. He won’t be called upon to perform a dance. Biotech firm Shire has risen from humble origins in Basingstoke to become one of the largest companies on the London market, worth £33bn, but it is Irish these days.
Takeda Pharmaceutical of Japan is merely “considering” an offer that is at “a preliminary and exploratory” stage, a statement riddled with get-outs, but chief executive Christophe Weber, a former high-flyer at GlaxoSmithKline, sounds serious about his plan to create his vision of “a truly global, value-based Japanese biopharmaceutical leader”.
He just needs to work out how to pay for Shire. In terms of stock market value, Takeda is the smaller company and shares in Japanese firms don’t go down easily with UK fund managers.
You can’t blame Weber for sniffing an opportunity, though. Shire is carrying a load of debt after its $32bn purchase two years ago of the US haemophilia firm Baxalta, a deal that looks less good after the arrival of tough competition from the likes of Roche. Shire is vulnerable – to Takeda or somebody else.