This week saw housebuilder Bovis Homes give 95,000 shares to chief executive David Ritchie in place of a cash bonus. The £282m turnover housebuilder said a cash bonus would be “inappropriate” given the state of the market.
In a week when the Association of British Insurers made rumblings about the excesses of executive pay, the company is in a minority.
The shares won’t “vest” before May 2012 and how much Ritchie can cash in depends on the intervening share price performance. In the Twilight Zone of what big firms believe are fair bonuses, it seems as equitable a solution as any.
It’s a far cry from the ever-shifting goalposts of Persimmon, Bellway and Taylor Wimpey, who have moved the criteria for hitting bonus targets away from profit and towards cashflow as the former evaporates from the balance sheet. Bellway even tried such a move retrospectively last year, much to the annoyance of the ABI.
The fundamental problem with that system is that housebuilders are run for profit not cash. The best way to generate cash at a housebuilder is to twiddle your thumbs for a year. You shift your stock, sit on the proceeds and are rewarded for 12 months of inertia.
Quick to spot the long-term perils of such a system, Persimmon has now assured us that next year it will move back towards more profit-based criteria. Presumably it will be no coincidence if they also move back into profit. As well as rendering bonuses meaningless, it seems to suggest that company bosses need a much larger financial carrot than the rest of us to get out of bed every morning. The tens of thousands of staff who have lost their jobs at the housebuilders in recent years would find that a pretty unpalatable premise.
Even more worrying though was what must have gone through the minds of the remuneration committee at Taylor Wimpey last year. Boss Peter Redfern was awarded a £800,000 “performance” bonus for sealing the firm’s rescue deal.
Never mind whether he was rewarded for just doing his job or whether he was partly to blame for the huge debt that nearly sank the firm in the first place, surely there is an inherent conflict of interest in rewarding your chief executive for agreeing the terms of a refinancing deal?
If you applied this principle to all companies, shareholders would have to be a worry that such large pots of gold at the end of the rainbow could cloud bosses’ judgement during the all-night sessions when they are thrashing out revised banking covenants? Will the terms always be exactly in alliance with the interests of shareholders when you have such a large wad riding on a successful outcome?
Expect more rumblings from the ABI.