Big bonuses set to turn housebuilders into new pay villains

by Aime Williams 29 December 2017

 After years of bankers bearing the brunt of political criticism over executive pay, housebuilders look poised to take centre stage as the new villains.

The chief executive of Persimmon, the UK’s second-largest housebuilder, with a market capitalisation of £8.4bn, is set to become one of the UK’s most highly paid executives.

Jeff Fairburn will be able to cash in almost half of a bonus expected to be worth around £100m from December 31. His total pay for 2016 was £2.1m, according to the company’s annual report.

The award has become a new flashpoint in the increasingly political row over high levels of executive pay across FTSE 100 companies, with MPs criticising Persimmon for paying its bosses big bonuses at a time when the British housebuilding industry is under pressure to build more homes.

Concerns over the housebuilder’s bonus scheme prompted the company to announce this month the resignations of Nicholas Wrigley, chairman, and Jonathan Davie, chair of the remuneration committee.

“It’s outrageous,” says Labour MP Clive Betts, referring to the bonus scheme, which was put in place in 2012 with the approval of 85 per cent of the company’s shareholders.

These bonuses are not a reward for housebuilding

Vince Cable, Liberal Democrats leader

Mr Betts, who is chair of the Commons Communities and Local Government Committee, adds: “I’m speaking on behalf of thousands of people struggling to pay for accommodation or struggling to get a home at all and thinking they can’t afford to get property — [the bonus] is unjustifiable.”

Other critics include Vince Cable, leader of the Liberal Democrats, and Stefan Stern, director of the High Pay Centre, who say housebuilders have taken advantage of government subsidies.

“These bonuses are not a reward for housebuilding,” says Mr Cable. “It’s simply about taking advantage of a government subsidy, which is unnecessarily expensive and doing a lot of damage by pushing up prices above the means of young families.”

Mr Stern adds: “Housing is a massive problem in the UK, and meanwhile these companies are arguably not building enough homes in the right places — and on top of that playing the system that works pretty well for them and taking public subsidy.”

He warns that the “political and reputational risk” to housebuilders is “pretty severe”, adding: “They don’t want to be the bankers of the next decade.”

Housebuilders have for years received large state subsidies through the Help-to-Buy equity loan scheme, which allows people to buy a new home with a deposit of 5 per cent and a low-interest equity loan from the government.

While not as explicit as the support received by the big UK banks from 2008 — the government injected more than £60bn into bailed-out Royal Bank of Scotland and Lloyds Banking Group, taking direct stakes in both — the scheme has buoyed the housebuilding sector.

The government announced a further £10bn windfall for the scheme this year, prompting a rally in housebuilders’ share prices that added about £1bn to their collective market capitalisations.

“The government needs to look at whether a scheme which has helped a sector recover after the financial crash . . . has had a knock-on effect of people pocketing enormous bonuses,” says Mr Betts.

Persimmon is one of the largest beneficiaries of Help-to-Buy, according to data from investment bank Liberum, with more than 55 per cent of its private completions making use of it.

But it is not the first British housebuilder to come under fire for its high executive pay. Tony Pidgley, chairman of London-focused Berkeley Homes, which does not benefit from the Help-to-Buy scheme, received £29m for the financial year ending in 2017.

Persimmon’s bonus scheme pays out according to the company’s share price, which has more than quadrupled since it was conceived. Pay experts say it is unusual as it is set over a 10-year period, meaning larger payouts. The company has defended the scheme because it has also returned significant amounts of cash to shareholders.

“There’s tension between what the City wants and what society expects,” says Sarah Wilson, chief executive of corporate governance consultancy, Manifest.

The housebuilders argue that they have been building more homes since Help-to-Buy was introduced. According to the Home Builders Federation, its members have increased the number of homes built by 50 per cent over the past three years.

Some analysts say Persimmon’s recent performance has not just been down to Help-To-Buy.

Anthony Codling at investment bank Jefferies says the company’s share price rose 30 per cent in 2012, after the LTIP was announced but before the scheme was launched a year later.

Even so, the size of Mr Fairburn’s bonus is acknowledged by pay consultants to be relatively large, and much bigger than those given to bankers following the financial crisis.

The Financial Reporting Council, the UK regulator, has also taken action to give chairs of remuneration committees more power to reject pay packages when a company’s share price has been boosted by a “government support initiative”. This was added to a recent revision of the UK corporate governance code, which the FRC confirmed included Help-to-Buy loan schemes.

One person close to Persimmon says there is a recognition among some board members that housing has become a political issue, and that the amount of cash awarded to executives looks excessive.

However, without owning stakes in the companies as it did with some of the banks, the government yields less power over the sector’s highest paid and, for now at least, Mr Fairburn looks set to keep his bonus.

Persimmon hails long-term outperformance

Persimmon, the UK’s second-largest housebuilder with a market capitalisation of £8.4bn, will allow top executives to claim almost half of a long-term bonus scheme from Sunday, writes Aime Williams.

Significantly, both chairman Nicholas Wrigley and the chair of the remuneration committee Jonathan Davie, who announced their resignations this month over the bonus scheme, said they regretted not placing a cap on directors’ earnings to prevent excessive bonuses.

Such a cap would either have set a maximum bonus for the company’s top executives regardless of share price movements, or would have granted the board power to rein in the amount if it exceeded a certain threshold.

None of the shareholders approached by the Financial Times would disclose their views on the bonus scheme, but Persimmon said no major shareholder proposed capping the bonus when the scheme was created in 2012.

The scheme gives selected staff the option to buy shares if they return a certain level of cash to shareholders.

Company representatives suggested chief executive Mr Fairburn give some of his bonus to charity, according to people familiar with the situation, but he was not in favour of the idea. A company spokesperson said the question of charitable donation was considered “a private family matter” for its executives.

The company also argues its bonus scheme encourages long-term outperformance because it runs for almost a decade. A spokesperson said the bonus scheme incentivises management to “deliver the capital return, expand the business and increase the share price”.


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