So back in 2012, Jeff Fairburn (CEO of Persimmon at the time) negotiated a remuneration package which was approved by the Persimmon Board and 85% of its shareholders. A key component of the package was a Long Term Incentive Plan share award. Persimmon then delivered really strong financial performance during Jeff’s tenure. Its share price increased by 500%. Jeff benefited in accordance with the terms agreed but this was controversial because of the amounts involved and the fact that a lot of Persimmon’s performance returns were because of Help to Buy. In the face of growing criticism, earlier this year he agreed to a reduction in the number of shares that he was entitled to. But that, and an offer to donate some of his earnings to charity, was not sufficient to quell the outcry and last week Jeff left his job at Persimmon’s request because his pay had become a “distraction” (however he retains the shares already awarded).
One corporate shareholder described the situation as a “classic corporate governance failure”. Persimmon now accept that they should have placed a cap on the bonus scheme. Both the Chair of the Board and Chair of the Remuneration Committee had already resigned due to that omission. However another corporate shareholder looked to Jeff’s position in all of this: “…regardless of any moral or societal duties, company directors have a legal responsibility to act in the best long-term interests of the company that employs them. … [Being] a company director, and in particular a chief executive requires……an understanding of where the company sits within the society within which it operates”.
The lesson for Boards and Remuneration Committees to take from this story is not that they can agree any sort of remuneration package they want, since they can always remove the employee if it attracts adverse publicity. Rather it is that they should take great care to ensure that they have understood what a remuneration package might end up costing depending upon different potential outcomes and that they put appropriate controls in place to ensure that the package does not reach a level which brings the organisation into disrepute.
It ultimately wouldn’t have made a difference in this case, but one of the political avenues of attack was the fact that Persimmon could pay so much to its CEO (and other Executives) and yet not pay the Living Wage to its employees (something which it has now committed to do from next year). The ratio of CEO pay to that of the average worker is something that listed companies with more than 250 employees will have to start reporting annually from 2020 and that transparency is likely to increase the pressure for greater pay parity across an organisation – since the Executive can only deliver a successful business if they have good staff on the ground.
The reminder for Executives is that their own personal interest is subservient to the interests of their organisation in the event of a conflict. Financial matters may well generate such conflict. It is therefore in the interests of both the organisation and the Executive that the remuneration package is properly considered at the outset and agreed on an informed basis.