Dominic Rossi at Fidelity Worldwide Investment is right: a long-term incentive plan is nothing of the sort if executives can get their hands on the financial prizes after only three years. That’s no time at all – about half the average business cycle – and it introduces a lottery-style element.
Rossi has been making the case for five-year holding periods for ages. Indeed, for the last couple of years, Fidelity, with £190bn under management, has been voting against the remuneration reports of companies that do not practise five years. As he says, he seems to be winning the argument. Two years ago, only four FTSE 100 companies complied; last year’s figure was 27; now the tally is 42.
So why haven’t other fund managers joined a campaign that appears to be succeeding and is definitely not fuelled by outrage over inflation in boardroom pay? Rossi, note, is limp on the quantum of executive pay. That’s not his fight. He’s interested in better “governance and structure” for share incentives.
The answer, one suspects, is that many fund managers elsewhere feel gagged because their overlords on the group board haven’t adopted five-year periods themselves. Only two FTSE 100 fund management houses make Rossi’s list of compliant companies: Standard Life and (new this year) Aviva.
The firms that should hang their heads in shame are: Aberdeen Asset Management, Legal & General, Old Mutual, M&G-owner Prudential and Schroders. If they won’t shift, progress will be slower than it should be.
Cashback at Tesco
There’s a revelation in Tesco’s remuneration report – and it’s not the £1.2m pay-off for former chief executive Philip Clarke, nor even his £13.7m pension pot. It’s the fact that, in Tesco’s calamitous year, Clarke and his colleagues met a few of their performance targets.
Naturally, the pay committee was obliged to award no bonuses. But the relevant table reveals that bonuses, if calculated “on a formulaic approach”, could have appeared at 28% of maximum. Clarke & co, you see, missed their profit and sales targets by a country mile but they cleared a few “strategic/non-financial” hurdles.
Internet orders were a hit. And “colleague engagement” was a satisfactory 66.5%, though this can’t have been hard to achieve: the shopfloor was surely as engaged as the rest of us by Tesco’s meltdown. As for CO2 reduction, wonders were performed: the “stretch” target was 38% but 41% was delivered. It could serve as an epitaph for Tesco’s year: it was good at hot air.
The more serious news within the pay report is that Tesco has been sufficiently shocked by the events to change directors’ contracts. From now on, clawback provisions will apply to cash bonuses and share awards. If profits are “materially misstated” or an individual has “contributed to serious reputational damage,” and so on, the company will want some or all of the money to be returned.
That is a stronger clause than will apply to Clarke, where Tesco will merely seek the recovery of the £1.2m termination payment “should it be determined in the future that there was gross misconduct”. Such determination will have to wait until the end of legal process, currently stuck with the Serious Fraud Office inquiry.
Clawback provisions are not perfect. Companies can’t simply apply absolute discretion; legal challenges are possible, indeed likely. But contractual clauses permitting clawback strengthen a company’s hand. Banks have been forced to adopt them. Others should too – and not wait for disaster to strike.
Royal Mail delivers
Still got those Royal Mail shares? You should feel reasonably relaxed, even at 500p versus the 330p float price. Chief executive Moya Greene is accurate in describing the trading environment as “challenging” but Royal Mail is putting up decent resistance.
Revenues were virtually flat last year but most of the various measures of profitability (there are several) moved in the right direction. The best yardstick is perhaps operating profits after “transformation” costs, which showed a 5% increase to £595m, a tribute to the group’s new ability to control costs.
Amazon’s decision to deliver its own parcels added capacity to an already over-supplied market. But Royal Mail still managed a 1% increase in parcel revenues. In letters, the likely departure of Whistl’s posties removes one long-term headache. Add it all up and Royal Mail should be able to keep churning out £450m of cash a year, in which case the dividend (up 5%) is solid.
George Osborne may still wish to bank the state’s remaining 30% stake. But he shouldn’t feel a need to rush.
This article was written by Nils Pratley, for theguardian.com on Thursday 21st May 2015 19.16 Europe/Londonguardian.co.uk © Guardian News and Media Limited 2010