Pay linked to a company’s share price means that executives share the pain or gain of shareholders. But since this encourages executives to migrate to where the best share price prospects are, how do companies respond when their share price is in decline?
A while ago, boohoo was on a roll. It absorbed PrettyLittleThing, a connected fast fashion business; and it snapped up Karen Miller, Coast, Oasis, Miss Pap, Warehouse and, in early 2021, the Debenhams brand and Dorothy Perkins, Wallis and Burton. Since then, the cost of freight has gone up, and it has become embroiled in combatting low pay amongst its suppliers and in reducing the environmental impact of its products. To grow, it has had to intensify marketing to a customer cohort that takes more products on approval and returns more, and yet compete on price. All this adds up to squeezed margins – and a negative earnings per share for the year to 28 February 2022.
So not a good year for boohoo. According to Iain McDonald who chairs the remuneration committee, financial targets were missed due to “disruption to the international delivery proposition” and “significant unforeseen pandemic-related cost inflation”. That wiped out three quarters of the annual bonus. The rest would be paid because “the management successfully integrated the new brands” and delivered its “Agenda for Change” (a euphemism for “supply chain issues”). But the wrong targets must have been set, for he feared that such a low bonus “would fail to reflect the tremendous progress made” over the year to February 2022, which included an improved “international proposition” where the aim is to “generate incremental sales potentially in excess of £5bn”.
Cue discretion by the remuneration committee, who over-rode the bonus formula. The directors ramped up the payout from 25 to 75 per cent – effectively tripling it, with two thirds in shares that have to be held for two years. That restored the year’s total pay for John Lyttle, the chief executive, from £0.9mn to £1.4mn, a level comparable to the £1.6mn he received the year before. The same was done for the finance director; and other “high performing senior managers” received similar proportions. Rewards for failure? Well, yes, but in fairness, the two founder directors waived their bonuses entirely, which left them with a 62 per cent pay cut. They also endured the value of their substantial stakes in boohoo falling by over two thirds during the year.
The bonus hike was all about hanging on to key people, and McDonald argues that their long-term share awards need revamping for the same reason. As this column noted last September, fifteen senior managers could share up to £150mn if boohoo’s share price has rocketed past £3.64 by June 2023. And Lyttle alone could receive up to £50mn if it exceeds £2.50 in March 2024. The flaw? Share prices rarely correlate with executive achievement – prices can be moved (as McDonald implicitly concedes above) by external factors beyond the control of management. Since the giddy outlook when these schemes were set, boohoo’s share price has slumped to less than £1, and McDonald now says modestly that they “may not vest at the levels originally hoped for.” He plans to leave them to wither and wants executives to receive additional share awards equal to twice their salaries, plus bonuses of up to twice their salaries too, with both subject to conventional performance conditions. Shareholders will be asked to approve the proposals at the AGM on the 17 June.
Maybe we should take a reality check. It seems that boohoo’s imperative for market share has driven some UK competitors, such as Missguided, into the ground. Yet despite this, as demand weakens with inflation, it’s having to spend more on marketing in a struggle to stem a decline in hits to the websites of its brands. It’s up against Shein, which is said to be the largest online fast fashion company in the world. Shein’s extraordinary low prices are partly due to its data-driven clothing design and a slick supply chain, but its lack of transparency has prompted allegations about low pay, long hours, child labour, and exploitation of the environment. In the US, while delivery delays have hampered boohoo, Shein was boosted by ex-President Trump’s trade war: China response was to remove export tariffs, and since his import duties applied only to larger-value shipments, Shein’s direct sales to US customers get in for free. Chinese companies can cut corners because it’s notoriously difficult to hold them to account. Effective government actions to ensure a level playing field might help.
Boohoo’s fundamental challenge is to decide what’s causing customer behaviour to change. If it’s a structural shift rather than temporary, a fresh strategy will be needed, for example, to focus marketing efforts towards a less fickle demographic. That would call for more than a new pay structure for the top team. Different skills – and people – might be needed.
