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Future shock

High pay is not restricted to Britain’s largest companies. Zillah Byng-Thorne, the chief executive of Future (FUTR), a £3bn FTSE250 company, has received almost £35mn over the past five years. And its shareholders have protested in a big way.

Byng-Thorne became chief executive in April 2014 and proceeded to transform Future from a niche magazine publisher into a digital powerhouse that now reaches 432 million people a month though its websites, magazines, newsletters and social media.  Her buy-and-build strategy involves “creating products and services that can be delivered across multiple channels… to optimise the monetisation of both our content and our loyal communities”. As the business has thrived, so has her pay – and investors have three main concerns.

 

Have her initial share awards been too generous?

Since 2016, her salary has almost doubled, from £300,000 (when the company made losses and was worth only £50mn) to £575,000 now. Her salary has increased with the growth of the group – and so has the gearing of her annual share awards. Until 2018, the awards matched her salary; then they were double it; and now, with a one-off “Value Creation Plan” (VCP) for executives, the pay ratchet has been cranked up even more. On 14 April 2021, she was awarded three tranches of 140,000 shares that will have to be held until 2026. The share price then was £22.36, so each tranche was worth £3.1mn.  That’s over five times her salary.

 

Have the performance conditions been too easily achieved?

For the past five years, she has received all the shares initially awarded. That the performance conditions were exceeded each time might suggest that hurdles had been set too low, but against this, look at the phenomenal growth in Future’s market value.  The new VCP depends entirely on this growth continuing, as measured by TSR (Future’s market value, adjusted for dividends, new share issues and buybacks). TSR needs to grow by 10 per cent a year for payouts to start, and to get the full amount requires annual growth of 40 per cent, equivalent to the market value quadrupling over the next five years. That’s ambitious, but the target was given a leg-up by being calculated from 30 September 2020, when the share price was £19.42 – £3 below the price on the date of the award.

 

Was there a cap?

There was no limit last year and Byng-Thorne received £8.8mn, of which about £1.2mn was in cash. The rest was in shares, which had soared in value by about £6mn. That’s because her strategy had catapulted Future into the fabled ranks of ten-baggers – its share price has gone up more than tenfold over the past five years. But that headline figure was ephemeral. The share price then was £35.74, but she has to hold the shares for another two years – and the share price has since fallen back by about a third. 

The VCP has a cap that, if needs be, will scale back the value of her share allocation to £13.6mn per tranche. She’s unlikely to receive the full £40mn for the three tranches, but the possibility caught the eye of shareholders, whose reaction at Future’s recent AGM must have perplexed its directors. Last year, shareholders knew all about this, and they could have blocked the new policy.  But they voted it in. And now in 2022, when it’s too late, an embarrassing 55 per cent voted against the pay report.

 

Compliant directors

The vote’s non-binding, so what’s mostly been achieved is an expression of displeasure. The concerns are about the performance condition, the “excessive pay creep” and also over-generous severance terms for the previous chief financial officer, who had only lasted nineteen months. Buy-and-build strategies place strains on finance departments who amongst other things, have to manage the financing, integrate the accounting, and determine which acquisition costs are charged to profits. 

Over the past five years, Future has more than doubled its shares in issue, largely to finance more acquisitions, but also to satisfy its executive share awards – for which it has created so many new shares that they are now bumping against the recommended 10 per cent limit (of issued share capital) in any rolling 10-year period. The directors’ solution?  To over-ride good governance, and increase Future’s limit to 15 per cent, the mandate for which they say the shareholders of 2015 had nodded through.

On pay too, Future’s directors seem to be suffering from hubris. They maintain that the VCP “will only vest if the company delivers exceptional performance”, but sceptical investors point out that share prices also depend on economic conditions beyond management control.  And whilst, Zillah Byng-Thorne’s pay has been amplified by success, breakneck growth is not without risk – her challenge is to build on organic growth by making the right deals and leveraging on them without mishap. And however much she’s paid won’t make much difference to how well she manages that.