Millions of shareholders saw the value of their stakes in companies slide during 2020, with the FTSE 100 ending the year down 15 per cent. Investors also endured cuts to dividends to help businesses weather the pandemic.
But not everyone was feeling the financial pain. During the same year, 77 per cent of long-term incentive plans (LTIPs) paid out to FTSE executives.
Long maligned for their generosity and opaqueness, analysis of LTIPs by the High Pay Centre reveals that these supposedly performance-related schemes in fact pay out to nearly all executives. Only 15 per cent of nearly 750 LTIPs over a ten-year period examined by the think tank did not pay anything. One in three of the sample paid 90 per cent or more of the maximum possible.
LTIPs award shares to senior staff if they meet certain performance criteria over a sustained period — typically three to five years. These schemes now account for about half of executive earnings and are usually paid on top of a salary, cash bonus, pension and other perks.
Handing bosses large numbers of shares is meant to align their interests with those of other investors. But LTIPs have actually ignited some of the fiercest rows of recent times over executive pay. One such scheme, at Persimmon, was responsible for most of the £75 million received by then chief Jeff Fairburn in 2018. He was asked to leave the builder amid public outrage over the size of the award.
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An LTIP once delivered £36 million for Sir Martin Sorrell when he was running advertising giant WPP. Investors at Cineworld revolted early this year over a similar scheme to pay out up to £208 million to the cinema chain’s bosses.
The High Pay Centre’s analysis will bolster those who consider that LTIPs pay too frequently — and too well. More than a fifth (21 per cent) of these schemes paid out 100 per cent of what was on offer over the past ten years, the study found.
Deborah Hargreaves, the High Pay Centre’s founding director, said the analysis proved LTIPs were not fit for purpose. “These schemes are paying out millions and they don’t work,” she said.
“How can they be an effective incentive if they almost always pay out? CEOs are reaping the benefits of luck and a rising market, when their employees are seeing any pay rises eroded by inflation.”
Against that, the remuneration committees who set the pay of senior staff at FTSE companies face a steep challenge to retain top talent. The path from the largest public companies to private equity is well worn.
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Sir Terry Leahy once told friends he earned more money working as a part-time adviser for budget retailer B&M, when it was controlled by private equity, than during his entire 32-year spell at Tesco. The supermarket soothsayer last month guided buyout firm Clayton, Dubilier & Rice on its successful £7 billion bid for Morrisons.
KKR, another large private equity firm, has hired a phalanx of FTSE 100 titans, including Sir John Bond, once of HSBC, Sir Roger Carr of BAE Systems and Asda’s former chief executive Tony DeNunzio. Meanwhile, former Sainsbury’s boss Justin King continues to earn well from Terra Firma, although he has scaled back his role for Guy Hands’ private equity outfit.
It’s not just higher pay that draws away the FTSE’s big players. With less transparency and scrutiny, there is less reputational risk for senior managers switching to private equity.
They are also freed from the grind of quarterly reporting and can take longer-term decisions without the need to placate shareholders, City analysts or the financial press.
None of which means FTSE companies can’t pay competitively while still reforming their LTIPs. For some of these schemes are being changed, with performance judged over a longer period or taking account of different criteria.
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Nathan Leclercq, head of corporate governance at Aviva Investors, said: “It is encouraging to see a significant increase in strategic targets, including ESG [environmental, social and governance] metrics in LTIPs. However, it is too early to see how this will play out in terms of making companies more cognisant of their impact on society and the environment.”
Having the best management running our biggest public companies is in the interests of millions of investors — indeed, any member of a pension scheme. Increasing the awards to the truly exceptional and moderating those to the average performers could help retain the stars — and drive more of those middle-of-the-road directors to up their game.
