Diageo (DGE) has many claims to distinction. With a market value of more than £60bn, it’s among the UK’s 10 largest companies and is a market leader in premium branded spirits, such as whisky, tequila and vodka, and of course Guinness. It sells its 200 brands in nearly 180 countries, and has a diverse board in terms of nationality, ethnicity and gender. Eight of its directors are women; three are men. And it still pays its executives in market-based share options.
In the UK these days, nil-cost options are more common. Market-based ones are more prevalent in the US, the difference being that with these participants have to pay for the shares when they exercise the option. The first option granted to Debra Crew, Diageo’s chief executive, was the equivalent of 30,076 shares at an exercise price of about £27 each. At 30 June 2023, the end of its last financial year, the share price was about £34. They’d have carried a gain then of just over £0.2mn, but just look at the gearing. Options come into their own when share prices are volatile: a doubling of share price would boost Crew’s gain to over £1.2mn – about triple the percentage gain experienced by Diageo’s shareholders.
This sort of leverage is acceptable for Diageo’s voluntary share options, which are savings schemes available to all employees. These are limited to more modest amounts and come with a discount to the starting market price, involve little risk for the employee and in certain countries are tax efficient. The executive options lack these advantages, but they can be exercised for longer – up to 10 years from the grant date. Diageo moderates its ones with performance conditions based on the group’s free cash flow and on total shareholder return (TSR) relative to the TSRs of a group of 16 peers. TSR measures the performance of the share price during the three years of the performance period (with dividends reinvested). The peers include Pernod-Ricard (FR:RI), Diageo’s closest competitor, drink rivals such as AB Inbev (BE:ABI), Carlsberg (DK:CARLB) and Coca-Cola (US:KO); and also consumer goods companies such as Mondelez (US:MDLZ), Nestle (CH:NESN) and Proctor and Gamble (US:PG).