This largesse stems from the company’s Growth Incentive Plan (GIP) proposed by Douglas McCallum in 2014, when he chaired the remuneration committee. This, he said, would “encourage the Company’s strategy of delivering growth through expansion and monetisation of its intellectual property...” an early hint that Ocado’s strategy was to head towards the tech sector. Since progress would be reflected in the share price, he implied, it was the only performance condition needed.
Several large investors objected. Exceptional performance might influence the share price. But so would takeover rumours. Awards ought to depend not on the share price, they said, but the elements of companies’ long-term strategies within the directors’ control. The vote at the 2014 annual meeting was 27 per cent against. The directors said that they’d note the concerns – and granted Tim Steiner, the chief executive, a nil-cost option over 4m shares anyway. The share price then was 319p, making his award worth £12.7 million – not bad for someone whose salary had just been raised to £0.5 million. The catch was that to receive them all, Ocado’s share price in 2019 would have to beat the growth of the FTSE 100 on average by 20 per cent a year. It would need to triple.
A rollercoaster to riches
A common criticism of long-term ‘incentive’ plans (LTIPs) is that their performance conditions are too easy. What about this one? By 2016 and throughout 2017, the share price had become mired in a range around £3. With just 18 months to go, the target still seemed wildly ambitious.
Then, in just a few months, Mr Steiner and his team closed four deals to facilitate e-commerce shopping with international grocery chains. After the one with Krogers, the second-largest supermarket group in the US, Peel Hunt dubbed Ocado the “Microsoft of Retail”. The parallel, the broker said, was with the Windows operating system, and how it had become relied upon by a wide range of users. If Ocado could shift its focus towards becoming the “open industry standard” for the world’s largest retailers, it could potentially lead to “greater penetration, stronger control and greater revenue”. The broker set a seemingly ludicrous price target of £17.
By the end May 2018, the share price had reached £10 and Ocado joined the FTSE 100. A year later, when the performance condition was tested, the share price was £13.53. Mr Steiner’s award was valued at over £54m. And that was the figure that went into Ocado’s 2019 annual report, published in February this year.
But that was then. Ocado now has partnerships with leading grocery companies in the UK, US, Japan, France, Canada and Sweden and, with the Covid-19 lockdown this year, home deliveries of groceries have come into their own. Ocado had to ration the surge in demand but its potential became more obvious. The market rebased Ocado’s share price yet again – it broke through £20. The value of Mr Steiner’s GIP shares at the time of writing has rocketed to £90m.
Excessive awards
Another common criticism of LTIPs is that the scale of the awards is too large. The year before the award was made, Mr Steiner’s total pay had touched £1m for the first time. To be awarded shares potentially worth £12.7m seems excessive in comparison. True, it was a one-off award to last until 2019 – so, averaged out, the pay element equated to about £2.5m a year, and then only if the share price soared. LTIPs are normally designed so that participants can expect to receive only half the shares awarded. That would bring the expected pay element down to about £1.25m a year. No doubt the directors thought it was proportional. But there was also another reason why they considered it imperative to crank up pay.
The need to be meaningful
When Ocado joined the stock market in 2010, two of its three founders took on the key roles. One was Mr Steiner. The other was Jason Gissing, the chief financial officer. In early 2014, he surprised everyone by announcing that he would be leaving. His pay had been about two-thirds of Mr Steiner’s and their earlier LTIP awards had failed to pay anything in the two previous years. Why bother working? That lost income was insignificant compared with the value of his 15m Ocado shares.
Attention turned to Ocado’s other key people. Who else would be tempted to leave? Ocado could hardly afford to lose them. The thinking behind the GIP, Mr McCallum said in that year’s annual report was “crucial” for “the retention of the senior management as the Company enters a critical stage of its development...” The GIP was in addition to Ocado’s more conventional LTIP, which was awarded every year.
Lack of control
The currency of LTIPs is shares, and that spurs another criticism – that reliance on the share price leaves companies with no control over either the outcome or the cost. The counter view is that the whole point of paying executives in shares is so that they experience the same gain or pain as investors. Admittedly this would make little difference for Mr Steiner. In 2014, he already owned 29m shares, either directly or indirectly.
The cost depends on how the LTIP is funded. At the time of the award, prudent companies buy the shares in the market, to be released later, via either their treasury function or an employee benefit trust. That way, in 2014, Ocado would have had to find £12.7m when it made the award to Mr Steiner. Any increase in value would be due to the stock market. It would cost the company nothing. This column has argued before that this makes increases in value (which for Mr Steiner was £41m) less like pay, and much more of an investment gain. But for Ocado, this is more debatable since it prefers to issue new shares instead. There’s no cash cost, but investors pay for it through a minor dilution of their shareholding.
Saving graces
The lenient view on Mr Steiner’s pay is that Ocado wouldn’t exist if it hadn’t been for him and his co-founders. Maybe high pay now is also justified because it balances the more modest £2m a year that he has received on average in the previous nine years. The question is: how much is too much? The answer to that depends on how well Ocado would fare without him.
And to his credit, Ocado offers all its employees voluntary share plans, so Ocado’s share price can benefit them, too. Those in Sharesave were able to buy Ocado shares in 2019 for 90 per cent of the market price in 2016. As investments go, in every company, Sharesave plans are no-brainers. It’s been known for employees to borrow, or pool family money, to set aside the required monthly saving. The worst that can happen after three years is that they get their money back. The one in seven of Ocado’s 15,000+ employees who were in that 2016 plan gained on average £31,940 in 2019. 163 had maxed out at £500 a month – and each of these made £104,596 for an £18,000 outlay. Considering that the average Ocado employee earns £22,500 a year, these sort of gains can be life-changing.
Even including these gains, the pay gap between employees and executives is still remarkably high. And the new LTIP that the non-executive directors have come up with to replace the GIP looks like it will add to the volatility.
The repeat offender
It’s called the Value Creation Plan (VCP) and it has the same flaw as the GIP. Its sole performance condition is Total Shareholder Return, which means the share price, since Ocado has never paid a dividend. This has to grow by 10 per cent each year, and executive directors will then “share in 2.75 per cent of the total value created” above that. And it won’t be relative to peers, so the outcome is wholly dependent on the vagaries of the stock market. This is now Ocado’s only LTIP, and in the years in which the hurdle is passed, Mr Steiner could receive up to £20m in shares that have to be held for five years.
Again there were objections, but at the 2019 annual meeting, only 24 per cent of the votes opposed the new policy, and in 2020, 30 per cent were cast against the remuneration report. The other investors must have accepted the directors’ claim that the VCP is to “reward sustained long-term shareholder return outperformance”. (It might not do that if the share price falls at an inconvenient time.) The other reason given – that it is “to align the interests of participants with those of shareholders” – also sounds hollow since three of the four participants already have significant shareholdings. The value of Mr Steiner’s Ocado stake now takes him halfway towards being a billionaire.
Perversion
The Ocado share price, which drives its executive pay, has climbed a wall of scepticism to a point where, for value investors, Ocado is grossly overpriced. But maybe that’s not the way to look at it. “The more successful we are, the longer it will take us to make a profit. I know that sounds perverse,” Mr Steiner said in an interview last year. His point is that reinvesting all its profits and, since 2010, raising £1.9bn in debt and equity from shareholders, has funded technology and logistics that have been vital for increasing profitability further down the line. Think of Ocado more like a FANMAG stock. Investors have bought into the vision. It’s up to Mr Steiner and his team to convert more of the aspirations into reality.
