At Ocado, memories of a bumper executive payout in 2020 still smart. But on Wednesday it won investor support to extend its contentious performance incentive scheme. Investors spurned the advice of proxy advisers. Instead, shareholders approved the online grocer’s move to extend the “value creation plan” (VCP) from 2024 to 2027 and add more managers to the payout pot. The plan could hand boss Tim Steiner up to £100mn across five years.
Long-term incentive plans have been on a roll ever since earning approval in the 1995 Greenbury Report; today more than 75 per cent of the FTSE 350 have LTIPs, says Alvarez & Marsal. Schemes like Ocado’s are rarer, sub 5 per cent of the index. These VCPs award management with a share of the spoils above certain benchmarks, usually on total shareholder returns (TSR).
LTIPs appeal because they supposedly align management interests with those of shareholders, although academic research does not support this. VCPs do the same with greater risk-to-reward, better for entrepreneurs at disrupter industries, or turnround artists at flailing companies.
Weaknesses attach. One occurs when share performance is driven by matters entirely unrelated to management. Housebuilder Persimmon’s boss Jeff Fairburn walked off with £75mn thanks to the boost from the UK government’s Help to Buy scheme. Subsequent schemes have capped payouts as well as included other metrics than pure TSR.
Incentivising top echelons can also demoralise those on the factory floor, as TP ICAP discovered. The online broker’s controversial scheme aimed to spur the integration of ICAP and targeted cost savings that, at one point, sought to curb brokers’ pay. It was ultimately axed.
Meltdowns in share price also skew the picture. Shareholders are likely to balk at resets to lower hurdle rates, but management loses a key incentive. Look at retailer Boohoo, whose management incentive plan pays out if the market cap — currently under £900mn — hits £7.5bn.
A broader impact on pay inflation ensues. Fighting for talent contributes towards what academic Alexander Pepper calls the ‘Remuneration Committee’s Dilemma’. Recruiters may second-guess competitors’ offers, and persistently overpay. Great for executives, much less so for shareholders.