Around the pandemic, a small corner of the business world had a Linda Evangelista moment. Except the supermodel came pretty cheap.
Evangelista said in 1990 that elite catwalkers didn’t “wake up for less than $10,000 a day”. A small club of company bosses couldn’t rouse themselves without the chance of a future payout of £100mn.
First in 2019 was Ryanair’s Michael O’Leary, whose potential bonus was €100mn for getting the airline’s shares to €21 “and/or” roughly doubling profits in five years. Then came fashion retailer Boohoo the following year with a three-year plan worth £100mn for its co-founders plus £50mn for executives on top of £50mn already on offer to its chief executive, based on share price performance.
Wizz Air’s József Váradi had to more than double the share price in five years to get his £100mn, agreed in 2021. Michael Murray, son-in-law and successor to Mike Ashley at Frasers Group, could get stock worth £100mn if its shares more than double to £15 before October 2025.
None of these companies are terribly conventional from a governance point of view. All the packages were roughly billed as the type of high-risk, high-reward “private equity-style” structures needed to retain and incentivise founders or particularly entrepreneurial bosses.
All of them were frowned on by proxy agencies (along with a similar £65mn Cineworld plan), essentially because the numbers were too big. But the problem isn’t really the size of the packages; it’s that shareholders were sold a pup.
No one should have believed that, as one of the above told me at the time, the boss would walk away with nothing if they didn’t hit the jackpot. It doesn’t happen — if the boss is untouchable or valuable enough to command this treatment, he doesn’t accept the payout disappearing out of reach.
Ryanair last year extended O’Leary’s contract to 2028, giving him an extra four years to hit his targets. In fairness, playing for time is right out of the private equity playbook when something goes wrong, in this case a pandemic.
Spreading the payout over a longer period isn’t terrible for investors. O’Leary also has a slightly higher profit target to hit and will only receive base salary in the meantime. After a recent rally, the shares would have to rise more than 40 per cent to hit their mark.
Boohoo’s shares are down nearly 90 per cent since its three-digit pay plan. A new variant, announced last week, remains objectionable: the overall size is only 13 per cent less than previous packages, although it covers more employees. And it starts paying out at 95p, 77 per cent below the stock’s 2020 high.
“We would certainly not expect such plans to be provided to incumbent management who were in charge while the share price hit the floor,” was the verdict of one fund manager when asked about these schemes generally.
But the original sin for Boohoo came last year, when the board put in place a traditional long-term incentive plan for its managers. High-risk, high-reward payouts are meant to take the place of conventional schemes. Now Boohoo’s leaders are double dipping, as the three-year LTIP remains in place despite the new “growth plan”.
The remainder are a mixed bag. Cineworld is mired in Chapter 11 restructuring in the US. Frasers’ Murray has headed in the right direction: its shares at about 800p are not far off their all-time high, up about a quarter since his scheme was announced, although the board also added a profit hurdle. Wizz Air looks next in danger of a rejig — Varadi’s full payout relies on the shares going from £45 in 2021 to £120 but instead, they’re at about £25.
It all makes questionable fodder for those who claim that racier pay packages incentivise better performance, or that London’s fastidious approach to pay is holding the market back.
Private equity, says Tom Gosling at London Business School, may ultimately be better equipped to renegotiate or axe bosses when required: “At listed companies one reason they’ve put these plans in place is that they have a dominant CEO who wants one, which itself is probably a red flag as to whether they have the strength of governance needed to handle these supercharged incentives.”
Wake me up when someone walks away from one of these with nothing.