There was disgust when, at the end of last year, it emerged that the chief executive, chief financial officer and managing director of Persimmon, the UK’s largest housebuilder, were in line for multi-million pound pay-outs related to long-term incentive schemes.
The company’s chairman and the head of the remuneration committee resigned after admitting the scheme was badly designed and should have included a cap on bonuses – while Jeff Fairburn, the CEO, said he would give away part of his expected £100m pay-out to charity following an outcry from politicians.
The issue is likely to flare up again when, the week after next, Persimmon holds its annual meeting.
The issue has become a lightning rod on the issue of executive pay are there is a suggestion some shareholders may take the rare step of voting against the reappointment of Mr Fairburn and his colleagues.
Aberdeen Standard Investments, Persimmon’s sixth-largest shareholder, has called on fellow investors to “consider their positions”.
A big vote against the board would be remarkable not only because it would mark a sharpening of teeth by institutional shareholders. It would be especially noteworthy here because, traditionally, investors vote against rewards for failure.
This would be an example of investors punishing a company for being successful.
Since 2012, when the long term incentive scheme was put in place, Persimmon has delivered a total shareholder return – a key measure – of 470%.
Its underlying profits have multiplied five-fold.
And its annual growth, including dividends, works out at an average 30.1% per year – compared with just 7.1% for the FTSE-100.
Some shareholders argue these returns were simply due to the ‘Help To Buy’ scheme introduced by the former Chancellor, George Osborne, to bolster demand among first-time buyers and get the housing market back on its feet following the financial crisis.
That the bonuses accrued by the Persimmon management were simply due to a government subsidy to the housebuilders.
This is wrong on a couple of counts.
First of all, Help to Buy was not a subsidy, but a loan to homebuyers on which, after five years, the taxpayer receives annual interest at an initial rate of 1.75% and that will rise over time.
Moreover, when any property bought with a Help to Buy loan is sold, the taxpayer also receives a share in any rise in the value of that property.
Given the rise in house prices since 2013, when the scheme was launched, that means taxpayers are probably already ahead by £1bn. Some subsidy.
But what of the argument that Persimmon simply enjoyed a free ride on the back of Help to Buy?
This is disputed by the City’s top housebuilding analyst, Anthony Codling, of the stockbroker Jefferies.
In a recent note to clients, he argued: “All UK housebuilders have been entrusted with varying amounts of Help to Buy, but not all have made the same returns.
“In our view, Persimmon has outperformed its peers and the UK housing market itself.
“We are not sure why some are choosing to penalise Persimmon for building more homes and generating cash for shareholders.”
Mr Codling pointed out that, while UK house prices have risen in England by an average of 6.2% per year since 2013, Persimmon’s average selling price has risen by an average of just 4% per year.
He also noted that, while housing transactions were up by an average of 5.5% per year, Persimmon had raised its housing volumes by nearly twice that.
Mr Codling also pointed out that Persimmon’s operating margins are now 40% greater than the housing industry average – whereas, in 2012, they were almost identical.
He went on: “[Persimmon] has generated its returns for shareholders by building more houses, rather than pushing up house prices.
“In our view, the profit growth at Persimmon is a story of ruthless cost efficiency, rather than a tale of a management team in a boat enjoying a rising tide.”
The biggest irony of all is that Mr Fairburn – who left school at 17 and joined the building trade as a youth training scheme apprentice – and his colleagues have only just started to benefit from their work.
The institutional shareholders now threatening to vote against their reappointment have already enjoyed the benefit.
They may have even received bonuses themselves for the boost to their own investment returns from the Persimmon’s strong performance.
They risk looking hypocritical if they vote against a successful management team that has more than delivered on all the targets it was set under the scheme – a scheme that investors themselves supported wholeheartedly back in 2012.
If fund managers think Mr Fairburn and his colleagues accrued these vast rewards solely due to Help to Buy then perhaps, as Mr Codling suggests, they should hand their own bonuses and investment gains to charity.