Tesco has revealed that new chief executive Dave Lewis received a golden hello worth more than £4m when he agreed to join the crisis-hit supermarket giant.
The cash-and-shares payment was worth £4.3m when it was made at the start of September and comes on top of a pay deal that includes a £1.25m salary and membership of two executive bonus schemes that could trigger multimillion-pound payments in the future.
Tesco told the stock exchange it had given Lewis 1.66m shares to compensate for awards surrendered when he quit his previous job at Unilever. The shares, which can be cashed in over the next three years, were part of an arrangement that included a £525,000 payment in lieu of the cash bonus he would have received from Unilever this year. However, Lewis is already sitting on a paper loss because the options were worth £3.8m at last month’s share price but the stock has plummeted in the wake of the recent accounting scandal, being valued at just £2.8m today.
Tesco’s new finance director, Alan Stewart – who joined from Marks & Spencer at the end of September – also banked 880,000 shares, worth £1.7m at the time, as compensation for awards forfeited when he left the retailer. Some institutional shareholders frown upon new directors being paid out of previous schemes as it defeats a key goal of those schemes, which is to retain talent.
Both executives, who were rushed in earlier than scheduled to turn around the embattled group, could yet be handed additional options to reflect dividends attached to the sacrificed shares. Stewart will also receive a further award in June next year to compensate him for a forfeited M&S bonus.
Lewis and Stewart are tasked with a major strategic overhaul of the group, which last week reported that pre-tax profits crashed 92% to £112m on the back of more than £500m of one-off charges in the first six months of this year. The retailer confirmed a £263m hole in its profits relating to the misbooking of supplier payments, a matter now being investigated by City regulators.
The details of Lewis’s golden hello were not published to the stock exchange when his appointment was announced on 21 July because at the time he had been unable to provide Tesco with the required details – notably the performance conditions – relating to his two Unilever share bonus schemes. The lack of information, revealed in a letter outlining the terms of the job offer and seen by the Guardian along with Lewis’s contract, meant the company was “unable to calculate the forfeiture values”.
The letter also stated that Lewis is eligible to participate in two executive bonus schemes, although in a weekend interview he said they were being reviewed. “One of the things that the chairman and remuneration committee are doing, and have asked me to look at, is reviewing what the long-term plan and the long-term incentives should be,” he told the interviewer.
Previous executives had been awarded bonuses based on a range of performance targets including earnings per share and return on capital. The maximum payouts from the existing short- and long-term bonus schemes are 250% and 275% of base salary respectively, although the company’s dire financial performance meant the former chief executive, Philip Clarke, did not collect a bonus during his three-year tenure.
In this year’s annual report Tesco announced its pay policy was under review and it would be consulting with shareholders on the matter. “The world of retail is evolving rapidly … and Tesco is changing to make the most of the opportunities this presents,” wrote Stuart Chambers, chair of the renumeration committee. “To ensure we continue to operate a remuneration framework which is fully aligned with our strategy and provides competitive rewards to management for the creation of shareholder value, the committee plans to undertake a review.” The revised plan will be put to shareholders at next year’s annual general meeting, he added.
One Tesco investor said the retailer had not been in touch yet but was not suprised changes were being considered. “Tesco is going to have a different strategy over the next couple of years than would previously have been the case,” he said. “The new chief executive has got one heck of a task and if part of that involves putting in place new incentives that shareholders feel happy with, then that is fair.”
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