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OPINION

Wizz Air sets a price target

Wizz Air sets a price target
August 5, 2021
Wizz Air sets a price target

If proof was needed that UK fund managers expect more stringent checks and balances on company directors than those from other countries, investors in Wizz Air (WIZZ) have recently provided it. At its annual general meeting on 27 July, they voted through a controversial pay policy that could pay its chief executive, Jozsef Varadi, £100m in 2026.

The directors were anxious to retain Varadi, who founded the Hungarian low-fare airline in 2003, and whose contract had almost expired. He had spearheaded a strategy that, they said, had increased Wizz’s share price since its IPO in 2015 by over three times that of Ryanair (RYA), while easyJet (EZJ) and IAG (IAG) had lost shareholder value over the same period. They said that the proposed pay policy was “critical” for encouraging him to sign a new five-year contract and that it would commit the top team and employees to delivering more shareholder value by giving them a slice of the pie.

Against this, the proposed policy failed to comply with best practice. Originally, instead of having a single long-term share plan for all executives, the committee had tailored one just for the chief executive. After pushback from shareholders, the top 11 executives were included in a similar plan, and the share price targets increased. 90 per cent of the awards depend on the share price, 5 per cent on reducing carbon emissions and 5 per cent on finding more women to fill senior management roles. For employees, a cash bonus plan is to be introduced linked to the growth in shareholder value.

 

Share price targets

The promise now is that if the share price rises by an average of a tenth every year for the next five years, Varadi will receive £20m-worth of Wizz Air shares. So, at the closing price on the day of the AGM of £46.59, that means a price of £75 in July 2026. If he can double that compound annual growth to 20 per cent, suggesting a target price of £116, his payout will be capped at £100m of shares. He’ll be able to sell two-fifths of these in 2026, followed by a fifth in each of the following three years. This won’t cost anything in cash because in 2026 the directors will create the shares due to the top team. But there’ll be a hit to profits of about €10.5m a year and at most the extra shares will dilute the share price by about 2 per cent.

 

What not to like?

Ahead of the AGM, which was held by proxy in Geneva, Institutional Shareholder Services and Glass Lewis had advised shareholders to reject the policy. The UK Investment Association, whose members collectively own a third of the shares quoted in London, also flagged substantial concerns. This was a one-off award for five years, while smaller annual awards are preferred; the payout relies too much on the share price, which is subject to factors beyond the company's control; and most tellingly the scale of the award is out of all proportion to his salary of €664,050. This compares with the average median pay of Wizz Air’s employees of €31,587 a year. Even the minimum payout would be worth more to Varadi than the €17m he’s received in total over the past 10 years. Yet despite the concerns of UK-based institutional investors, the directors were quietly confident of getting the policy through.

 

The vote

There was a good reason for this. For years, the EU, like the US and Japan, has limited foreign nationals' ownership of its airlines. In the EU’s case, its airlines have to be majority-controlled by EEA nationals (ie those from EU countries, plus Switzerland, Norway, Iceland and Liechtenstein). Since about 60 per cent of Wizz Air’s shares were owned by UK investors and Brexit Britain refused to join the EEA, Wizz Air had to remove the voting rights of about half of those shares. EasyJet took similar measures, while Ryanair said it would simply ban the British from showing up to, speaking at, or voting at its shareholder meetings.

At Wizz Air’s recent AGM, a third of the 16m votes cast were against the new pay policy. Two-thirds supported it. But this was out of a total of 103m shares in issue – a turnout of only 16 per cent. Those UK votes sacrificed to Brexit might have made all the difference.

But there’s another way of looking at this. Varadi is 55 and perfectly capable of taking on new challenges. He could go to a competitor, or maybe set up a rival airline – he did it with Wizz Air; why not again? And if the share price reaches the threshold of £75, Wizz Air’s market value will have increased by over £2.5bn, against which the £20m due to him would seem small change. Some evidently took the view that you have to be pragmatic about these things.