His sales were said to be for “financial planning” or, as he later elaborated on PI World, “I chose to take the advice about the capital gains tax (CGT) implications of a change of tax policy that’s likely to happen.” What he had in mind was that if CGT were aligned with marginal income tax rates, his gains would be taxed at 45 per cent instead of 20 per cent. Those early sales could have saved him over £2m. Had he sold in November though, when four fellow directors offloaded their holdings, his selling price would have been over a quarter more. All these sales sent more red flags fluttering.
The group made the point that the three executive directors who had cleared out their shareholdings “retained shares which can be vested under the Company’s Long-term Incentive Plan (LTIP) scheme”. This could have been explained better. IG Design’s share awards are in the form of nil-cost options – shares in other words, that allow participants to choose when to have them transferred into their names. These used to be awarded every year, and although Mr Fineman appears to have sold up, in fact he can currently claim another 641,808 shares whenever he wishes. He’s also likely to obtain more from ongoing share awards whose performance conditions are yet to be tested.
Low hurdles
That scheme has now been ditched for a new one. Under this “Value Creation Scheme”, which will be awarded every three years, he could receive shares worth as much as £12.5 million in 2023 if IG Design’s market value grows sufficiently.
What caught the attention was the artificially low starting point, which makes payouts much easier to achieve. This assumed a share price of 450p and a market value of £433.7 million. Payouts are triggered if these grow by a compound 7.5 per cent a year between April 2020 and March 2023. That makes the hurdle price for March 2023: 559p. The price on 8 January 2021 when this was announced? 596p!
Why back-date it? The company says the award was due in July 2020, but was delayed because of “the uncertainty caused by Covid-19”, so the price had to be worked out from “an average of closing share prices in 2020”. But that’s disingenuous. When pressed, it said their “complex process” involved analysing “the volume-weighted average over different periods throughout the calendar year”. Smoke and mirrors, then. By coincidence, the starting price of 450p is suspiciously close to the 460p that Mr Fineman sold his shares for last August…
At first sight, the other hurdle appears more challenging: “no VCS awards will vest unless the adjusted profit before tax for the 12 months to 31 March 2023 is at least $60 million." This is two thirds higher than consensus 2021 forecasts (US$36 million). Note the word “adjusted”. In the year to March 2020 reported profits were £0.3 million, but the group adjusted its profits to £29 million. And in March 2020, with perfect timing for lockdown, IG Design bought a US craft company, CSS, and switched its accounting into US$. The expected profit boost from this acquisition has already raised consensus forecasts to US$59 million for 2022 – near enough the hurdle for the following year.
High hopes
What’s easily missed is that payouts will depend not on these hurdles, but on how much executives manage to increase shareholder value. Reach those two hurdles, and on my calculations, Mr Fineman will receive shares worth about £2.3 million. To receive the full £12.5 million, he (and the other 60 participants in this scheme) would have to double IG Design’s market value to £1 billion.
The group has failed to get this across. Apart from improving its communications, it could do with other changes too. More objective Board discussions about pay would be encouraged in the boardroom if its company chairman was not a member of the Remuneration Committee. New blood might challenge the magnitude of its share awards and their excessive shareholder dilution, and press for senior executives to retain a minimum number of shares, as in other companies.
It’s not unreasonable for executives to sell some company shares at the moment. Mr Fineman hasn’t said how he plans to spend his £8m proceeds, but there’s talk of higher future taxes on gifts, or even a wealth tax. Aim shares could fall heavily if their current exemption from Inheritance Tax were to be removed. So prudent shareholders can’t be blamed for shuffling their personal finances before the budget on 3 March. There’s a lot riding on the judgement of the Chancellor of the Exchequer.
