Are leading investors wrong to criticise house-builder Persimmon for its £600m executive bonus pot?
Rachel Cunliffe, deputy editor of CapX, says Yes.
Persimmon’s aim was simple: incentivise executives to develop land in the most profitable way. The bonus scheme it established rewarded managers if they hit ambitious targets over a 10-year period – targets they have outperformed dramatically, building more homes more efficiently. Investors should be thrilled. The share price for Persimmon more than tripled, from £6 in June 2012 to over £19 now. The company has been able to invest £2bn in developing new land, and is on track to return £1.9bn to shareholders as expected. In short, the scheme worked. While questions could be raised about the kinds of homes Persimmon built, its growth in profits far outweighed the concurrent rise in house prices. And investors were the first to benefit. It is easy to draw false links between the housing crisis, fuelled by planning regulations and cheap credit, and the bonus pot for Persimmon executives. But Persimmon profited by increasing supply, not demand. It makes no sense to demonise executives for simply succeeding at their jobs.
Alex Edmans, professor of finance at London Business School and an associate at Oxera, says No.
High pay is justified if warranted by good performance. Indeed, in these pages I previously defended the pay package at Persimmon’s competitor Berkeley on this basis. And the trebling of Persimmon’s stock price would seem to justify the bonuses. Yet while the general principle of pay-for-performance has been followed, investors are right that there’s still room for improvement. First, much of the stock price gains were due to a strong housing market, rather than good management decisions. Performance should be benchmarked to industry averages to ensure executives aren’t rewarded for luck. Second, Berkeley’s options vest in 2021, whereas 40 per cent of Persimmon’s vest in 2017. Longer horizons are key to ensuring that pay is for sustainable long-term performance rather than short-term actions. Third, the amount of options granted is based on the amount of cash returned to shareholders, which can encourage management to pay out profits as dividends rather than investing for the future.