Tesco workers share a £110 million bonus pot, but directors get a 50% pay cut. Or do they?
By any standards, supermarket Tesco (LSE: TSCO) is one big business.
For instance, it has a near-30% market share in the UK, operates around 5,000 stores worldwide and employs over 500,000 people in 14 countries. What's more, in its 2011-12 financial year, the retailer recorded sales of £72 billion and a profit before tax of £3.8 billion.
As I write, Tesco shares trade at 305.6p, down 4.3p, which values the group at £24.6 billion. In short, Tesco is one mighty outfit.
Rewarding staff
To reward employees for their hard work in a difficult year, Tesco's British workers are set to share a bonus pot of more than £110 million. Over the past five years, Tesco has paid out more than £500 million from this all-employee bonus scheme.
However, despite achieving record sales and profits, Tesco failed to meet some of its UK performance targets. As a result, its top 5,000 managers will receive a reduced yearly bonus. This amounts to just over a sixth (16.9%) of the maximum payable under their bonus scheme.
Furthermore, executive directors will pocket only 13.54% of the maximum payable under their bonus scheme. Also, chief executive Philip Clarke turned down his £372,000 personal bonus, saying: "I wasn't satisfied with the performance in the UK and I won't take the bonus."
Digging into directors' pay
Digging deeper into Tesco's remuneration report, something very unusual comes to light.
For once, it appears that a PLC's board directors have shared their shareholders' pain, following Tesco's first profit warning for more than 20 years. To show you what I mean, here are the salaries and other cash awards paid to Tesco's directors in 2011-12:
| Executive director | Notes | 2011-12 (£000s) | 2010-11 (£000s) | Change (%) |
|---|
| Richard Brasher | Retired March 2012 | 1,138 | 2,262 | -50 |
| Philip Clarke | CEO | 1,155 | 2,260 | -49 |
| Andrew Higginson | Retiring September 2012 | 1,149 | 2,287 | -50 |
| Tim Mason | Deputy CEO, CMO | 1,634 | 3,094 | -47 |
| Laurie McIlwee | CFO | 1,137 | 2,206 | -48 |
| Lucy Neville-Rolfe | Corporate and Legal Affairs | 895 | 1,756 | -49 |
| David Potts | Retired December 2011 | 788 | 2,308 | -66 |
| Total | | 7,896 | 16,173 | -51 |
As you can see, total executive cash payouts in Tesco's latest financial year were below £7.9 million, versus almost £16.2 million for the previous year. In other words, cash payouts to executives more than halved from one year to the next, down 51%.
What's more, given Tesco's worst UK performance for two decades, the retailer has been clearing out its board, with three of the seven directors listed above either retired or set to retire.
Oddly, Tesco's best-paid director was not CEO Philip Clarke. It was Tim Mason, Clarke's deputy and Tesco's chief marketing officer, partly thanks to his £555,000 expat allowance (£282,000 after tax).
However, a very different picture emerges among Tesco's nine non-executive directors. In total, they received almost £1.5 million in 2011-12 -- a pay rise of £230,000, or nearly a fifth (18%).
Thus, it seems that Tesco's executive directors have been punished for the poor performance of its shares over the past 12 months. Or have they?
Cash is just the beginning
Of course, the gravy train that is a FTSE 100 board position goes so much further than mere cash. Directors' remuneration has become a fantastically complicated field, partly thanks to remuneration consultants who exist purely to bid up directors' contracts and, in doing so, their own fees.
As a result (and in line with many other major firms), Tesco's directors pick up far more in extra benefits than they do in boring old cash. For example, here are the increases in pension transfer values for the supermarket's directors in 2011-12:
Pump up my pension
| Executive director | Transfer increase (£000s) |
|---|
| Richard Brasher | 1,429 |
| Philip Clarke | 3,829 |
| Andrew Higginson | 1,776 |
| Tim Mason | 1,825 |
| Laurie McIlwee | 1,446 |
| Lucy Neville-Rolfe | 1,514 |
| David Potts | 1,876 |
| Total | 13,695 |
As you can see, thanks to their membership of an exclusive final-salary pension scheme that other workers can only dream of, these directors saw huge increases in the value of their pension pots in a single year.
These uplifts range from over £1.4 million for Richard Brasher to more than £3.8 million for CEO Philip Clarke. In total, the combined values of these seven executive directors' pension pots leapt by £13.7 million in Tesco's latest financial year. This sum equates to around 173% of the cash payouts listed in my first table. In other words, these pension increases were worth far, far more than pay.
Free shares and options
As well as seven-figure pay and pensions, Tesco executives also receive a bewildering array of executive share options, free shares and incentive shares awarded under LTIPs (long-term incentive plans).
As well contributing to the all-employee Sharesave (my favourite savings plan), Tesco's executive directors have been granted over 10.9 million share options. However, almost all of these are 'under water', because their exercise prices are above Tesco's current market price. Right now, these options remain worthless until Tesco's share price rises by between 25% and 75%.
Despite the slump in Tesco's share price in 2012, its directors won't need to take on a second job. My final table shows the total shares and options owned by these seven executive directors:
| Executive director | Shares | Options |
|---|
| Richard Brasher | 1,258,585 | 3,501,665 |
| Philip Clarke | 1,832,007 | 4,352,977 |
| Andrew Higginson | 707,081 | 4,076,589 |
| Tim Mason | 1,975,704 | 1,545,587 |
| Laurie McIlwee | 75,506 | 2,144,448 |
| Lucy Neville-Rolfe | 458,036 | 2,516,326 |
| David Potts | 1,708,622 | 3,005,260 |
| Total | 8,015,541 | 21,142,852 |
In total, these directors own more than eight million Tesco shares, very few of which they bought themselves. Instead, the vast majority of these share awards came from free and incentive shares granted to them by Tesco's remuneration committee. Today, these shares are worth £24.5 million, which is a nice chunk of equity in the firm.
In addition, these 'lucky seven' Tesco bosses own over 21 million options to buy Tesco shares, the value of which is set to soar if they get the UK's number-one supermarket back on track.
Is this fair?
I am somewhat taken aback by the riches showered on Tesco's top bosses. My reason is simple: Tesco's share price has crashed in the past year. Just short of 12 months ago, on 31 May 2011, Tesco shares hit their 2011 closing high of 419p. Today, they trade below 306p, which is more than a quarter (27%) down from their 2011-12 peak.
Hence, in my view, Tesco's board directors have been vastly overpaid to preside over one of the firm's biggest share-price collapses since the dark days of 2003!
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> Cliff does not own shares in any of the companies mentioned. The Motley Fool owns shares in Tesco.
