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Pay and dismay

7 November 2018 By Aimee Donnellan

Corporate pay police need bigger truncheons to avoid Persimmon’s fate. The UK housebuilder got in a mess because it couldn’t legally peg back departing Chief Executive Jeff Fairburn’s ballooning incentive scheme. To avoid further ignominy, remuneration committees need to tool up.

Fairburn’s days were numbered. The point of no return appears to have been a car crash BBC interview last month when the CEO refused to comment on his 75 million pound pay packet. That was unwise, given it appeared to be based more on luck than skill. The company’s pay policy had failed to anticipate that a housing-obsessed Conservative government would launch a scheme to maintain demand a year after his pay targets were set. As the company’s share price nearly trebled, the board said on Wednesday it had no choice but to honour his legal entitlements.

While that is undeniably true, it is also something of a cop-out. A nuclear option would have been for Persimmon to simply refuse to pay Fairburn’s package. The company would have almost certainly lost such a simple case of contract law, but the court of public opinion would probably have been on its side. This, more than ousting the CEO, would have been the first step to redeeming its tattered reputation.

As it is, Persimmon’s redemption will be glacial. As the company scours the City for a new CEO, it is preparing to begin a new phase of restraint. There will be no share incentives and the remuneration committee will hold a veto to cap pay if it is deemed excessive. While this is certainly a start, an even bolder step, according to one remuneration expert, would be to include a specific legal clause that allows the pay committee to claw back money if the company is suffering reputational damage.

Persimmon won’t be the last pay scandal. Investors warn that pay structures have become unnecessarily complicated, and with many large companies rewarding executives with shares, another nine-figure payout fuelled by a lucky windfall is possible. A get-out clause is the best way for boards to avoid further egg on their face.

 

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