There is growing anger in the UK after quoted company Persimmon announced the early closure of a key executive long-term incentive plan. When agreed back in 2012 the scheme was set to close in 2021 but such has been the solid performance of the share price and significant capital repayments to shareholders that the scheme will now end in July 2018. It is reported that 150 key personnel will share a bonus pot of between £500 million up to £800 million. The final payout will depend upon the share price performance next year but already we know the company’s chief executive will walk away with in excess of £100 million in shares.
Is it right to incentivise management?
In many ways it is difficult to appreciate the need for a bonus scheme which can incentivise a company’s chief executive to the tune of £100 million plus. We’re not talking about underpaid and overworked executives – the majority already received what many deem to be a fair rate of pay for a fair day’s work (although others would say that many are already overpaid). Why should they be further incentivised to do their paid job?
Collectively shareholders benefit
If we take UK housebuilder Persimmon for example the key personnel will share in a bonus pot valued at between £500 million and £800 million. This comes at a time when the company has increased the number of new house builds by 65% since 2012, invested £2.9 billion into new land and is about to pay the latest dividend which will see around £3 billion repaid to shareholders since 2012. Yes, the bonus scheme does seem generous and indeed many have described it as “corporate theft”. However, collectively shareholders in the company have benefited to a greater extent although in many ways this is not the argument.
Capping bonus payments
Institutional investors in Persimmon are up in arms and placing extreme pressure on these key executives to forego part of their bonus payments. They have no legal obligation to reduce these payments, the scheme was passed by institutional shareholders back in 2012 and everything has been above board and transparent. Two executives of the company’s remuneration committee have tendered their resignation and will both be leaving the company in due course. Again, despite pressure from some members of the remuneration committee those who participated in the scheme have done nothing wrong.
The main problem is that the maximum payouts from the scheme were not capped in any way. They were left open and nobody really expected the company to perform so well. The fact that the UK government’s Help to Buy scheme, lending new homebuyers 20% of the value of a property, has led to a significant increase in Persimmon’s turnover has caused further uproar. The UK government, and all political parties, have given their full backing to the Help to Buy scheme. While the argument that taxpayers are effectively funding these bonus payments is causing some embarrassment, the UK government acted in the best interests of first-time buyers.
Corporate greed
We have seen a number of multibillion-dollar bonus schemes over the years, some of which have attracted an array of negative comments. If we take a step back and look at the situation from a distance, so long as collectively shareholders in the company benefit significantly more than those receiving bonus shares or bonus payments, is this really wrong? Is it the fact that the figures quoted are in the hundreds of millions of dollars? Do we sometimes forget the potentially short career of a top executive? Is it not human nature to be incentivised by money?
While careful consideration needs to be given to maximum bonus payments to directors of quoted companies, many experts would suggest that these bonus schemes have historically “encouraged” better performance.