Is corporate narcissism helping to destroy capitalism?

The best that critics of the whopping £110m plus share bonus being awarded to Jeff Fairburn, the chief executive of Persimmon, have come up with so far is that he should give some of his ill-gotten gains to charity.

Even Persimmon’s chairman – Nicholas Wrigley – who has been forced to resign over the controversial bonus scheme – is said to have whispered to Fairburn that a little hand out to charity would help douse the flames and put the housebuilder in a better frame.

What nonsense. However egregious the bonus being paid to Fairburn, the share scheme under which he earned this extraordinary amount of money is legal. What’s more, it was approved five years ago by Persimmon’s institutional shareholders – with a vote of 85%.

While donating some of the dosh to charity is an understandable sentiment it is wrong, and misses the point on so many levels.  It’s not for anyone to tell the FTSE-100 chief executive what he should do with his money. That’s a private matter best left to him and his conscience.

Singling out Fairburn for the guilt trip treatment is also unfair: the chief executive is one of three board directors who will be sharing in a notional £200m profit. There are another 140 managers who will divvy up between them the £800m profit which they stand to earn collectively when the scheme comes to its finale. Who is to play God over who should be giving their bonuses away?

The real target of anger over Persimmon’s bonus arrangements should be directed at the self-serving pay consultants who advised the group’s RemCo on the scheme, the board for approving it and shareholders who gave it the green light. Before I go into what should change, it’s worth looking at the Persimmon deal in more detail to understand how it came about. Fairburn and his colleagues have made loads of money because they came up with a long-term incentive plan in 2012 which was fixed to how much Persimmon pays to its shareholders in dividends, and other forms of cash return.

When the LTIP scheme was signed off in 2012,  Persimmon’s shares were £6.57. Since then, profits have soared, oiled by the government’s Help to Buy equity loan scheme which has boosted first-time house prices.

Today those shares are worth £26.57. Bingo. Money straight into the bank as the scheme awards executives the right to buy shares in Persimmon at deeply discounted prices. The company’s bumper profits has put it on course to meet all the conditions. The 51-year-old Fairburn can now buy the first tranche of almost two million shares — at present worth £53 million, for £8 million, valuing the bonus at £45 million. In 2021, he could become eligible for another tranche, taking the total bonus to almost £112 million at today’s prices.

You have to assume the company’s investors – top names from Black Rock to Norges Bank- will have looked at the fine print of the LTIPs. They may have thought the group would never meet the targets. Some will not have bothered to read it at all and some will not have worked out how the scheme would pan out.

They have kept quiet until now because they have also enjoyed the fruits of Persimmons success. But now their mood is souring: they are irritated by the LTIP because it lacks targets related to other elements of Persimmon’s strategy, like how much money is going back into the business. Earnings per share are also going to be diluted because of the massive share award, increasing investor annoyance.

Shareholders need to get tougher: they should stand up and be counted and insist that all LTIPs are scrapped. Some are, but not enough. There is only way that FTSE pay is going, and that’s up. In a sane world, it is shareholders who supply the capital – and therefore the risk – who should be most against pay awards such as those granted to Persimmon’s executives.  And that’s because the returns made by shareholders overall have not been great as the FTSE 100 index is the same today as it was nearly two decades ago.

They should also listen to Sir Nigel Rudd, one of the few sane voices that I hear coming out of the industrial world. He is one of the UK’s most successful serial entrepreneurs, chairman of the British Growth Fund and a former deputy chairman of Barclays. It was Rudd who once described Barclays’ investment bank as a’ workers cooperative’ as all the goodies went to the staff rather than its shareholders.

For two decades now, Rudd has been consistently vigorous in his criticism of the inequities between corporate pay and performance. In an ideal world, he would get rid of all options, and make executives buy their own shares with their own salaries.

He’s quite right as most options and other share incentives are a one way bet which involve no risk on behalf of the person taking up the scheme. To change this, Rudd believes that executives should buy shares with their bonus. As executives are always allowed to sell enough shares to cover the tax charge on shares that arises on vesting, he suggests changing the law so that the company could lend this amount to the executive . “In that way you create a downside that would change some behaviour.”

Rudd’s background as an entrepreneur – he created Williams Holdings with Sir Roger Carr – means that he thinks differently to professional executives. “Whenever a big decision is to be made I always go through a process where I imagine that I personally own all  the shares. You would be surprised how many times this has put me at odds with advisors and even my fellow directors.”

He doesn’t mince is words: “If you are risking your own money, it doesn’t half concentrate the mind.”

Exactly. Most shareholders who invest in companies such as Persimmon are not risking their own real money – they are merely the stewards of the funds which ultimately belong to public and private investors, and of course pensioners. It’s your money but remote money to them. Nor do the executives running most listed companies rarely risk their own dosh because they are given options as freely as sweets from a candy store in a one way street.

The Persimmon bonuses merely confirms the broader societal view that corporate bosses are a bunch of gangster narcissists out for their own pocket. This is patently untrue in most cases. Yet the constant drip drip examples of such naked greed is a dangerous poison that is infecting an distrustful public and its relations with business.

That’s not good, and nor is it a fair judgement on the millions of straight, hard working small businessmen and women. Ironically, these complex share option schemes are the antithesis of entrepreneurial capitalism as neither the shareholders nor the directors risked their own skin in the game. Shareholders must wake up to the dangers of allowing these unfair rewards if they want to save their own skins.