Top executives may be brilliant – but their pay's about timing and luck
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Version 0 of 1. If you are the chief executive of a FTSE 100 company, and thus the recipient once a year of oodles of share-based incentives worth several times your £1m-ish salary, the quickest way to get seriously rich is as follows. First, trash your price. Second, wait for your incentive shares to be awarded at the bottom of the market. Third, lead the glorious recovery. Even if you succeed only in getting the share price back to the original starting point, a V-shaped journey is much more lucrative than going sideways in boring fashion. You will collect a windfall gain. Long-term shareholders will just hold an asset restored to its former value. There is no suggestion that Mark Cutifani, chief executive of Anglo American, has used sleight of hand to manufacture a windfall gain for himself. Indeed, it would be impossible to do so. Anglo’s share price, as with all the big miners, is blown about by forces beyond its control – such as the prices of iron ore, coal and copper. The point, though, is that the V-shaped passage of Anglo’s share price in the past two years has boosted the value of Cutifani’s share awards in a manner that seems perverse. Anglo was worst performing FTSE 100 stock in 2015 but became the best performing in 2016 as commodity breezes changed direction violently. It was Cutifani’s good luck to be awarded his shares at the right moment. He got his stock at 444p a year ago when the award was worth £4.4m. Now, after the return of the share price to £11.84, that package is worth almost £12m. That is after only one lap of the track and via a scheme that is supposed to measure “long-term” performance. Cutifani may be doing an excellent job, but common sense says the size of his likely windfall owes more to timing than to personal brilliance. Remembering last year’s 42% shareholder rebellion over precisely this possibility of a windfall gain, Anglo’s remuneration chair Sir Philip Hampton proposes a few tweaks to address what he calls “the issue of volatility”. Cutifani’s combined payout from his incentive awards for 2014, 2015 and 2016 will be capped at £13.1m and maximums will also be placed on future awards. That is logical as far it goes, but surely Hampton has missed the main point. Luck and timing are baked into long-term incentive schemes, or Ltips. That is especially true in a feast-or-famine business like mining. Extending holding periods, and similar fiddles, can reduce the problem but the structure remains a mathematical nonsense. That is one reason why a few enlightened fund managers would be happy to abolish Ltips altogether and accept that executives’ basic salaries might increase as a result. Reform should be encouraged. Ltips – the biggest single driver of inflation in boardroom pay over the past two decades – have had their day. They are too complicated and, as Anglo has demonstrated, external factors can generate life-changing sums. Bring on simpler pay schemes. Wood Group’s Amec takeover makes sense When a £3.3bn company splashes out £1.9bn on a “transformational” acquisition, paying half in shares and half in cash, what do you get three years later? The answer, in the case of Amec, which spent the sum on US group Foster Wheeler in 2014, is a pile of trouble, towering debts followed by submission to Wood Group’s all-share takeover offer at only £2.2bn. Amec Foster Wheeler can claim that its share price, at 546p, looks healthier than the sub-400p seen a year ago when long-serving chief executive Samir Brikho departed. All the same, Amec’s shares hit £12 in 2014 before Brikho set his eyes on Foster Wheeler, a bigger deal than he had attempted in the past. The purchase took Amec into unfamiliar downstream parts of the oil and gas industry and, more importantly, saddled it with £1bn of debt just as the commodity prices fell. If Wood Group had not turned up, Amec would be hitting its shareholders with a £500m rights issue. Against that unlovely prospect, the all-share takeover makes sense. Wood reckons it can find £110m of annual cost savings for an upfront cost of £190m spread over the first three years of ownership. That is a decent payback. The purchase is still a big adventure for Aberdeen-based Wood but its reputation for solidity and conservatism is better than Amec’s ever was. All the same, you’d expect Ian Marchant, chairman of Wood, to have read his Amec history and avoided using the dreaded “transformational” word to describe Monday’s deal. He didn’t, and will have to hope the curse is not inherited. |