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Fund managers hope for more big paydays

How was it that John Ions, Liontrust Asset Management’s (LIO) seasoned chief executive, received £6.6mn during its accounting year to March 2021? Over the past five years, he has received almost £20mn – the sort of amount normally seen only at the largest FTSE 100 companies. Liontrust, though, lurks in the foothills of the FTSE 250 index. 

The short answer is, of course, performance-related pay, and there’s no doubt that Liontrust has seen stellar growth. Ions’ pay in 2021 was driven by impressive flows into his group’s funds, both t home and abroad, which were boosted by three selective acquisitions. Profits soared, and so did the share price – a transitory £2.6mn of his £6.6mn was due to share price gains. 

His bonus, though, seemed to have been decided by what felt right. The bonus pool just for him and the finance director was equivalent to half the increase in the group’s adjusted profit before tax, even though this had already been factored into how the bonuses were determined. Think of it as a form of profit-sharing. Previously, the non-execs had limited Ions’ bonuses to five times his salary (of £348,000), but the group had never adopted a formal cap, and for 2021  they made it eight times. Of this £2.8mn bonus, £870,000 was in cash (2.5 times his salary) and the rest was in shares, which he’ll receive in three years’ time as long as he doesn’t resign (or misbehave), and there are no unpleasant surprises in historic reporting or risk management. 

Under the new policy proposed in February, the directors made sure that they kept Ions’ pay whole: he might still receive £7mn, but only for “exceptional holistic performance” if the share price goes up by 50 per cent over the next three years. Their main thrust was to rebalance executive pay packages, so they suggested raising Ions’ salary to “the market norm” for FTSE 250 companies of £550,000. Never mind that Liontrust is one of the smallest companies in the index – fund managers expect high pay for themselves.

To offset this higher salary, they set a bonus cap of 4.5 times salary (£2.475mn). The bonus would still share in additional profits, but performance scorecards would “include greater focus on ESG-type metrics” and be made tighter. That would pay out about 50 per cent more cash upfront and proportionately less in shares. Since both executive directors already each own about a million Liontrust shares, they can instead choose to defer their pay into Liontrust funds – a perk of working for a fund management company.

A radical change was also proposed for the long-term share awards, which are in the form of nil-cost options.  Performance will be assessed over three years, and executives won’t be able to sell the shares for a further two years.  But instead of linking this annual share award to salary, for Ions it’s fixed at a straight 0.25 per cent of the number of shares in issue, which works out at 153,130 shares for each of the next three years. In February, this would have equated to £2.3mn, but the first award is not due until June 2022, and since then the share price has dropped from £15 to about £10.          

So exactly what was it about these proposals that shareholders disliked? The pay cap and the increased clarity were to be welcomed – the previous lack of transparency had been fodder for suspicious minds. Breaking the link between the share awards and salaries was also positive – salary increases will no longer crank up this performance-related pay. No, the key sticking point was the scale. So even though the directors had amended earlier proposals after feedback from the institutional investors who own over half of Liontrust’s shares (and include CFP SDL UK Buffettology Fund (GB00BF0LDZ31) which holds 8 per cent, BlackRock 7 per cent, and Abrdn 6.5 per cent), a massive 45 per cent of votes at the general meeting opposed the new policy. This was despite the thumping majority that had approved his £6.6mn in the remuneration report at the annual meeting just a few months earlier. This protest was not enough to prevent the policy from getting through, but it was a setback. “The remuneration committee is acutely conscious of the votes against,” the directors conceded, but they remained adamant that “the best interests of all our stakeholders” is best served by keeping the “exceptional management team” on board. 

Fund managers quite rightly scrutinise executive pay in the companies in which they invest, so it’s reassuring that they can get a dose of their own medicine. Their own pay is driven by growth in the assets that they manage, but that’s cyclical – when markets turn down, private investors run for the exits. In the current market, if Liontrust’s top team can repeat last year’s performance, they certainly will be “exceptional”. But whether or not any would deserve as much as that hypothetical £7mn is another matter.