The Motley Fool

Invest In The Man Or The Machine? Are Burberry Group plc, WPP And Tullow Oil plc’s CEOs Too Big?

Executive pay is back in the headlines as a result of shareholders opposing another multimillion-pound pay package — this time it is Burberry‘s (LSE: BRBY) new CEO, Christopher Bailey.

Whilst new to the role of CEO, Mr Bailey is no stranger to Burberry, having joined the company in 2001. He is the chief creative officer and the CEO title was added to his job description earlier this year. As creative officer, Bailey is credited with driving the brand to global success from its low of five years ago. Sales in 2010 were £1.2bn and for the year ending March 2014 they were over £2.3bn.

Bailey’s package is made up of salary, allowances and performance awards, and at the current share price is worth over £30m. Burberry argues that Bailey is vital to its success and that his pay is in line with other global luxury-goods companies.

In addition to his salary and performance awards, Bailey has already received multimillion-pound share bonuses of over a million shares, which were given as part of a golden handcuff deal to secure his tenure as other fashion houses were rumoured to be head hunting last year.

Fashion colleagues declare that “Christopher Bailey is Burberry” and is “a genius” and while shareholders have no doubt about his creative talents they see a red flag over Bailey’s pay packet. In addition there is a question mark over his dual-role abilities and doubt about his ability to master some gritty challenges ahead, such as unfavourable exchange rates and falling product licensing revenues in its biggest market.


Key Man Risk

Burberry’s admission that Bailey is vital and integral to the company’s success should raise concerns for shareholders. Even discounting a risk of sudden departure, combining senior executive roles that have separate and distinct responsibilities weakens the corporate governance perspective. One person performing a dual role will also short cut any decision-making process, rendering internal controls weaker.

Visionary Executives

Comparisons are being made between Bailey and other prominent highly paid CEOs, such as Sir Martin Sorrel, CEO of WPP (LSE: WPP), and Aidan Heavey, the founder of Tullow Oil (LSE: TLW).

Both Sorrel and Heavey are both visionary leaders, commanding multi-million pound pay checks and are credited with building their companies from scratch. They each have held a tenancy in the top job of almost of almost 30 years.

Sorrell bought WPP and began building the worldwide marketing services company by making aggressive acquisitions of advertising-related companies. WPP is now the world’s largest communications services group, with revenues of more than £11bn and a market capitalisation of £16.4bn.

Aidan Heavey built Tullow Oil by buying a small engineering company and through a series of acquisitions and turned it into FTSE oil major. He is the longest serving CEO on the FTSE and draws a remuneration package of £2.8 million.

The so-called ‘star culture’ (when a success strategy is highly correlated to a single executive talent) is a critical vulnerability for a business. However, there are companies that can make big gains with minimal risk. Access our no-obligation report today, which identifies companies that you may want to buy while their valuations are still low. Simply click here to get immediate access to your FREE report!

Lisa Walls-Hester has no position in any shares mentioned. The Motley Fool recommends Burberry Group and Tullow Oil.