Imperfect execution

Now she’s at Marks and Spencer (MKS). In April this year, she was appointed the chief strategy and transformation executive, charged with developing and implementing the strategy for turning its businesses around. M&S has also strengthened its senior executive team with a new finance director and a new managing director for its clothing and home business. 

Having a strong management team and a sound strategy are two of the ingredients needed for success. Where M&S has come unstuck is in the vital third element: execution. Actually managing to do everything that has to be done – and doing it well – has proved elusive. The table, which shows how much M&S chief executives have received over the past 10 years, also charts how the company’s decline has been reflected in pay. 

A gamble almost pays off

When Marc Bolland became chief executive in May 2010, M&S took a gamble. He had no experience in clothing. But there again, he was credited with turning Morrisons around, after having joined from Heineken with no experience of food retailing. Morrisons had locked him in with a potential bonus and three years worth of share awards. M&S had to compensate him for losing those. That cost £2.6m (within the £9m he received in his first two years).

The view then was that womenswear drove the footfall that generated the relatively high profit per square foot in M&S stores. His main challenge was to reinvigorate M&S’s core clothing business by attracting the more fashion-conscious (often reluctant to shop where their mothers shopped) without losing its older, more traditional customer base. Its food business also needed clearer direction. 

During Mr Bolland’s tenure, M&S launched a promising new website and built a new distribution centre. The food business gained traction. So did the international business. But the clothing and home business still struggled to make headway against strong competition. Despite various initiatives, womenswear declined in almost every quarter for five years. Customers were shifting away from stores, lured by e-commerce competitors such as Asos and Zara, and despite heavy investment, the M&S website was behind the curve.

Executive pay can be a brutal taskmaster. It rewards achievements, rather than efforts. And those competitive headwinds cost M&S executives dear.  In most years, their share awards barely paid out, and the performance in 2014 was too poor to warrant an annual bonus. Mr Bolland received about £2m in three of the last four years of his tenure.

To many skinny and slims

In 2016, Steve Rowe stepped up to succeed Mr Bolland. Mr Rowe had been head of clothing and previously, like his father before him, the food business. He’d worked for M&S for 25 years, prompting Robert Swannell, M&S’s chairman, to say in the annual report: “It is this insider knowledge coupled with an appetite for transformation that makes [Mr Rowe] uniquely qualified to lead our business forward.”

Mr Rowe’s main challenge in April 2016? Just as for Mr Bolland six years before: to reinvigorate M&S’s core clothing business. Mr Rowe has also radically cut capital expenditure and set about closing and relocating stores, which cranked up exceptional costs. Last year, a rights issue to fund a joint venture with Ocado knocked the share price. In September, M&S fell out of the FTSE 100. The current share price makes it worth about £2bn, a third of its value in 2016.

Last year, it misjudged demand and its supply chain proved too inflexible, with the result that its fastest selling lines in womenswear sold out too early. In menswear, it underestimated the girth of its male customers, or as Mr Rowe put it: “Too many skinny and slims and too many small sizes”.  This resulted in “the worst availability in casual trousers in my life”.

All this has taken a toll on Mr Rowe’s pay. In the last three years, he’s had no bonus, but at least his performance share awards paid out to some extent.  These were based on three equal performance conditions. For 2019/20:

• The target earnings per share, set in 2017, and adjusted for the rights issue, was 26.8p. What was achieved (16.7p) failed to meet the criteria.
• If M&S shares had been bought in March 2017 and dividends reinvested, then by March 2020, they would have been worth less than shares bought in most of its main 13 competitors. That performance test also failed.
• The one condition that was passed last year related to return on capital employed. The threshold performance was 12.1 per cent. This one scraped home with 12.7 per cent.

Mr Rowe ended up receiving 11.2 per cent of the shares, which would have been worth £236,000 when they were awarded to him. But by March (when the 2020 annual report was published) they were worth half of this. The further fall in share price since then suggests that they could be worth even less by August, when the shares are due to be released.

Not only that. By 2021, Mr Rowe is required to own M&S shares worth £2.07m. He’s nowhere close. That means that he had to hang on to the 296,173 shares he owned in April 2019. Another 119,675 were due to him. If their loss of value (due to the remorseless fall in the share price) is factored in, it more than halves the £1.2m that the annual report says he received in 2019/20. 

…and along comes Coronavirus

Covid-19 came at just the wrong time for M&S. During the lockdown, in common with its peers, sales of clothing and home fell off a cliff. Food was left stranded with no click and collect, and no home deliveries. Another few months and the deal with Ocado would have resolved that. As it was, M&S ended up cobbling together an arrangement with Deliveroo via apps.

And Mr Rowe’s pay has been shrunk even more. His salary has been frozen. His £200,000 pension allowance has been taken away. For 2020/21, his annual bonus has been scrapped, and the conditional shares being awarded this year will equate to 175 per cent of his salary, a cut from the previous 250 per cent. An additional performance condition will apply “based on strategic transformation goals relevant to the achievement of the business strategy over the next three years”. It shows the depth of the uncertainty surrounding retailers at the moment that the remuneration committee considers it unrealistic to set any targets until later in the year. 

Why cut the award? The committee says it’s “to reduce windfall gains from directors’ awards”. Considering that over the last four years, Mr Rowe has received awards with an initial face value of about £8m, but has actually received £0.66m in shares (which then proceeded to lose much of their value) some disillusioned shareholders might interpret that as a triumph of hope over experience.

The irony

What this illustrates is that senior executives in struggling companies are paid significantly less than those in successful ones. You might think that’s fair enough. Successful companies can afford to pay well; struggling companies can’t.

The irony is that a struggling company is far harder to manage than a successful one. The pressures are greater. There are no financial cushions. Funding limitations restrict investment. Errors and omissions readily attract public scrutiny. 

So while companies might see the need to adopt hair-shirt policies to facilitate their survival, they risk losing people to competitors that offer better job and pay prospects. Some think of making special retention payments. That’s a slippery slope. Besides, in the current uncertain retail environment, many executives will prefer to stay where they are. 

If vacancies do arise, the intense pressure and insecurity of the roles often limits the pool of potential candidates. Being paid in the shares of a company running to stand still is likely to be less financially rewarding than in a company with a rising share price. That pushes up what has to be paid to recruit people from competitors. Then there are the outstanding share awards that they would forfeit by resigning. The cost of buying out those can prove to be prohibitive. At the same time, the fallen share prices of faltering companies make it cheaper for competitors to recruit from them.

Sharing the burden

Despite this, the sheer thrill of the challenge can sometimes attract people. Archie Norman was 37 when he cheekily applied to become the chief executive of Asda, then a company flirting with bankruptcy. Later he discovered that he had been the only candidate. Eight years later, when it was sold to Wal-Mart in 1999, his leadership had helped make it the second-largest supermarket chain in the UK. In 2010, he began chairing ITV. By the time he left in 2016, ITV’s share price had more than quadrupled. Since September 2017, he’s been chairing M&S, with a firm hand on strategy. 

Katie Bickerstaff beat Mr Norman by four years. She was head of HR and only 33 when she was asked to manage Somerfield. She said she couldn’t do it. The chairman said, “Of course you can. You start next week.” She went on to head up Kwik Save, and later Dixons. Now she’s to work closely with Mr Rowe at M&S. “Let’s be honest. A chief strategy and transformation officer is what the chief executive’s day job is,” a former M&S director was heard to say at the time. It seems that M&S has a succession plan.