Why has £100 million become the new magic number for CEOs?
£100m is a nice round number. Maybe that is why it is the figure of choice for the entrepreneurial chief executive’s incentive scheme.
József Váradi at Wizz Air has one. Ryanair’s Michael O’Leary has one. And now Michael Murray, Mike Ashley’s future son-in-law and soon to be chief executive of Frasers Group (formerly known as Sports Direct), has one too.
These are sometimes plugged as the types of high risk, high reward schemes on offer in private equity, paying out big but only if stretching targets are hit. But it’s the fact that £100m is such a very large number that seems to stick in the throat of the proxy agencies that advise investors how to vote.
They don’t put it like that of course. “The terms of the scheme are not in line with UK best practice,” ISS said of Frasers’ scheme.
That is one way to characterise a pay plan that gives a 31-year-old former property developer who happens to be marrying the founder’s daughter a £100m slice of a publicly listed company, despite limited evidence of his management expertise.
Murray has been Frasers’ “head of elevation” since 2018 and was in charge of the property division for two years before that. Maybe he is uniquely qualified to run Frasers, especially if one of the main requirements of the job is getting along with majority-owner Ashley. That could be worth £100m in itself.
As it happens, there was more to dislike in Frasers’ scheme than just the number. Glass Lewis and Pirc suggested investors vote against it, as 49.1 per cent of independent ones did. The share price has to more than double over four years for Murray to get his money. It only has to stay there for 30 days, though. And once the conditions are met, he can sell half straight away and the rest a year later.
But technical gripes aside, the proxy agencies’ opposition was entirely predictable. They didn’t like Boohoo’s £150m scheme. They didn’t support Cineworld’s £130m one. And they didn’t support Wizz Air’s £100m plan, even though ISS described reservations about the scheme structure as “ancillary issues”. In the end, “the maximum opportunity is considered excessive and no compelling explanation has been provided to justify the quantum”, ISS concluded. In other words: £100m is too much money.
Predictable too, that when put to a shareholder vote all the plans have passed. So is there any point in the proxy agencies’ protestations?
They do result in a rap on the knuckles. Academic literature indicates an ISS recommendation to vote against causes 10 to 25 per cent of shareholders to do so. Companies where 20 per cent or more of votes are cast against a pay proposal have to explain themselves to investors and are put on the Investment Association’s naughty list.
But it may be that boards increasingly do not care. Losing a CEO over pay can be bad: Smith & Nephew shed 9 per cent of its market cap when it refused to meet Namal Nawana’s pay demands. Whereas before no board wanted to secure less than 90 per cent support for a pay vote, now more companies are comfortable with 50 or 60 per cent support so long as the resolution passes, one pay consultant says.
Tom Gosling, a board adviser, points out that it is far from clear that ISS is good at picking out policies that will be bad for investor returns.
What proxy advisers’ recommendations do is provide some investors with reputational insulation. They can say they voted against a proposal to put the next Persimmon-type scheme — where executives did walk away with more than £100m — in place.
And, big flashy bonus schemes aside, Britain has actually experienced a period of some pay restraint over the past decade. Deloitte research shows the median FTSE 100 CEO received £2.85m in pay in 2020, the fourth consecutive year of decline.
You can’t justify a £100m pay plan for a UK public company by reference to peers. You probably can’t justify it at all. But at least if these schemes do pay out, £100m will be a small proportion of total shareholder return. And thanks in part to the proxies’ influence, a decent chunk of investors can point to their righteous objections.