Persimmon 2018 AGM Voting Recommendations

We (Peter Parry of UKSA and I) met the interim Chairman Nigel Mills and the Rem Com Chair Marion Sears on 19 April. This was part of the Persimmon charm offensive to try and minimise the negative impact of the  2012 LTIP which is due to pay out massively.

Nigel and Marion were not responsible for the 2012 LTIP. That was done before they joined Persimmon. Those responsible have resigned and Nigel and Marion are trying to make the best of an awfully difficult situation.

They had read the ShareSoc April Newsletter, which had raised a question about Persimmon’s “concealment” of the true scale of the potential payments, a term they felt was inappropriate. Whilst there are questions to ask, I agree the choice of the word concealment was not appropriate and am writing this blog to correct that wording.

They also pointed out that we had overstated the potential payouts, as the maximum permitted awards of 30 million award shares were never made. Currently, only 23.3 million shares are outstanding. We had postulated £750 million potential payouts, whereas they are estimating £438 million, and having reviewed this, I think the maximum might be £600 million.

In response to a question about the new share price cap of £29 incentivising capital returns in preference to share price increases, they confirmed that there were more than adequate cash resources to make the capital returns and hence dysfunctional behaviour was not a concern. The corollary of this is, in relation to the awards with an option exercise price of currently £11.09, we can expect capital returns of at least a further £11.09 by 2021, so as to reduce the exercise price of the awards to zero! These prospective capital returns provide a strong underpin to the current £27.71 share price.

The Rem Com sought legal advice (the cost should have been disclosed in the annual report but has been omitted) and were told they could not vary the 2012 LTIP awards unilaterally. Instead, they have frozen salaries and said they will not make bonus or LTIP awards in 2018. In addition, they have secured agreement on the numbers of shares that cannot be sold before 2021. These are all positive steps. In my opinion, shareholders do not need to worry about the incentivisation of the top team, as they have such huge shareholdings, vested share awards and unvested share awards. This will be true so long as they do not sell their shares.

Accordingly, this is the question we plan to ask at the Persimmon AGM on 25 April:

We welcome the improved transparency of reporting of the 2012 LTIP. The annual report on page 64 estimates the total LTIPs payments at £438million. However, we estimate that the total payments from the 23.3 million LTIP award shares will be £600 assuming the share price new cap of £29 is achieved.

The annual report makes much of Persimmon’s high standards of governance.

Could the Chairman justify how not explaining, until now, a potential transfer of value of some £438 million (and possibly £600m) from shareholders to employees – and not highlighting also that the acceleration of the Capital Return Plan in recent years implied an advancement of this transfer from the stated date of December 2021 – can be considered an acceptable standard of reporting to shareholders?

We are now told that these awards may be cash settled. Could a representative of the auditors explain how the absence of this information in the financial statements constitutes a true and fair view? And how much is provided for in Note 20, or elsewhere in the annual report?

If we are allowed a second question, we will ask:

The Chairman in his report states that ‘the Board believes that the 2012 LTIP has been a significant factor in the Company’s outstanding performance’. This implies that the management team needed to be paid £438 million to do their jobs properly. Could the Chairman explain how much is going to be needed in the future to achieve the same effect, or does the board intend to replace the current team with one that considers a fair salary is enough to persuade them to put forward their best efforts?

The timing of the lack of clear disclosure was very striking. The first acceleration of the CRP was in 2015. The precise timing and amount of the new CRP was spelt out and therefore the consequential new vesting date could have been stated. There was not a peep – indeed in the options table in the Rem report, the date remained Dec 2021.

Even in the 2017 results announcement, there was not a peep (apart from an incomprehensible – to a non-tax specialist – note to the financial statements mentioning a tax payment of £88m).

Vote recommendations

In respect of the 2018 AGM vote on the remuneration report, which is a backward-looking vote and non- binding, we recommend members vote against.It is important to signal to the Board shareholders’ displeasure at this unnecessarily high remuneration and the history of poor disclosure.

We would have liked to have supported the new policy, but that has not been put to a vote at this year’s AGM. Instead, the Persimmon Policy remains unchanged from that approved at the 2017 AGM, which says….

Cliff Weight

Note: The author holds a small number of shares in Persimmon, having sold in the past few months most of his shares, which he had held for many years.
 

For the convenience of readers, below are our recommendations for the 2017 and 2016 Persimmon AGMs.

– Persimmon Voting Recommendations – PRESS RELEASE 92 27/03/2017

– ShareSoc Advises Investors to Vote Against Persimmon Plc Remuneration Report – 11 April 2016  

ShareSoc (the UK Individual Shareholders Society) is advising its Members to vote against the Remuneration Report resolution at the forthcoming Annual General Meeting of Persimmon. Persimmon has performed well in recent years. However, ShareSoc considers the salary, pension and bonus of the CEO Jeff Fairburn to be unnecessarily high, and particularly so when his potential equity incentives are £100 million and he is on target to make this amount or more. The main reason for the high pay is the excessively generous 2012 LTIP scheme.

Background

Persimmon has performed well in recent years as is shown in the annual report page 68 and in the share price graph below. Its share price was £6.40, when it introduced its LTIP in 2012 and has since increased to £20.

The CEO’s 4.832 million options have vested as to 40% of the maximum due to the capital repayment (I.e. distribution to shareholders) made in the year, with a gain to date of £40 million and his potential gain is £100 million. To put this in context, this is almost 20% of the company’s 2015 profits. According to Cliff Weight, ShareSoc spokesman on remuneration issues, who said “I think this Persimmon report fails the ShareSoc Remuneration Pillar of Clarity and Transparency. You have to cross-refer to the 2012 AGM circular to find out all the details. I think the exercise price will be zero because it reduces by the gross aggregate value of dividends (see para 6.2 of the circular).”

Weight continued “I am surprised CEO Jeff Fairburn has been given an increase in the company’s contribution to his pension to 24% of any salary above £149,400 (previously it was only 9%). I doubt this will motivate or help to retain him, so it could be considered as a waste of shareholders’ money and (worse still) may attract unnecessary media attention and waste valuable Board time that could better be spent on other matters.”

In addition to the pension increase, he was awarded a bonus of £1.238 million. Cliff Weight commented “Persimmon CEO Jeff Fairburn has equity incentives akin to private equity-owned companies, but has a salary, pension and bonus like a FTSE100 company. He has the best of both worlds.”

Background Information

Cliff Weight, who has been advising ShareSoc on remuneration matters, is the author of the Directors’ Remuneration Handbook and has over 30 years’ experience as a remuneration consultant. He is a member of the QCA Corporate Governance Expert Group and has recently contributed to the soon to be published QCA Remuneration Guide. He is currently working with ShareSoc, the Individual Shareholders Society, to develop ShareSoc’s Remuneration Guidance, which will contain specific recommendations for companies with less than £200 million market cap. He is a member of the Advisory Board of the High Pay Centre, and the Editorial Board of Executive Compensation Briefing, and isa non-executive director of MM&K, the leading independent remuneration consultant. He has also been a non-executive director of the remuneration committees of two hedge funds.