Some directors take the view that, because investors expect them to increase shareholder value over time, they should link executive pay directly to the company share price. Frasers (FRAS) and Boohoo (BOO) have adopted this as policy, but the two have taken very different approaches.
Frasers:
Share price when pay plan announced (August 2021): £6.50.
Target prices by 2025: £12 (executives) and £15 (chief executive).
Frasers is asking shareholders to approve its new share plan at its AGM on 29 September. If its share price closes above £12 over any 30 consecutive dealing day period before October 2025, three executives will each receive 600,000 shares. That target is almost double its current share price and the payout to each executive would be worth £7.2m, a fraction of the £3bn or so by which the value of the company would increase. After paying tax, each executive would receive shares worth about £2m in 2025 and the same again in 2026.
There’s a different target (of £15) for Michael Murray, who is currently a consultant, and engaged to founder Mike Ashley’s daughter. The plan is to grant him an option over 6,711,409 shares if he takes over as chief executive next May. That odd amount is to make the shares worth £100m if the price target is achieved and, because it’s an option, he’ll be able to exercise it (into the shares) at any time until 2032.
There are strings attached. The remuneration committee says it’s likely to reduce the number of shares to offset the executives’ salaries, and it has “discretion” to add other performance conditions or cut the payout if it thinks fit, although whether it will ever do this remains to be seen. It also promises that a participant who performs badly or resigns will forfeit his/her awards.
Boohoo:
Share price when Growth Share Plan (GSP) announced (Sept 2018): £1.77.
Target price range: between £2.50 and £4.37 in March 2024.
Share price when Management Incentive Plan (MIP) announced (June 2020): £3.64.
Target range: between £4.84 and £5.75 in June 2023.
In 2019, Boohoo tailored a one-off GSP for John Lyttle (its chief executive) to pay him £50m if Boohoo’s market cap grows by a compound annual 23 per cent during his first five years. The starting point was £2.037bn, so on my calculations, the stretch target is £5.73bn. The intention is to encourage organic growth so if, for example, new shares are issued to make another acquisition, these won’t be included in the calculation. However, shares will still be created, for example to satisfy its employee share plans and to pay its non-executive directors, so the future number of shares in issue needs to be estimated. Assuming these will number 1.31bn, the threshold target becomes £2.50, and the stretch target equates to a share price of £4.37.
The MIP introduced last year could pay shares to 15 of its key people worth £150m in June 2023, of which £100m would go to the two founder directors. But only if the market cap has risen to £7.554bn – using similar assumptions, that suggests a share price of £5.75, which the committee now describes as “exceptionally demanding”. In both plans, an extra performance condition has been added: to sort out Boohoo’s supply chain issues.
The differences
The focus by Frasers on the share price means that, despite its already high level of debt, share buybacks would help it (incrementally) to achieve its targets. Mike Ashley can call the shots here, since his private companies own almost two-thirds of Frasers. He won’t be a participant in either plan, so his votes will presumably carry the day at the AGM. If the targets are achieved, the shares he already owns will increase in value by well over £1bn.
By contrast, Boohoo’s emphasis on market cap suggests that executives would benefit if it issued more shares, even though it operates with net cash, rather than debt. Being an Aim stock registered in Jersey, its remuneration committee was able to introduce the plans quickly without shareholder approval. It says that this was to ensure that “participants were immediately incentivised to deliver stretching share price growth”, although it’s hard to believe that the executive chair, Mahmud Kamani, needed any more incentives. If the stretch target is reached, he will receive £50m more shares, but the ones he already owns would have gone up in value by about £485m. The same goes for the other founding director, Carol Kane, whose existing share stake would gain by about £100m.
The flaw in these schemes is that they assume a direct link between executives’ achievements and the company share price, but this ignores the macro and other reasons for share price movements. These targets are ambitious, yet when they were set, the non-executive directors must have thought that they were attainable. Time will tell whether or not they were right.
