Companies with rising share prices and dividends do not suffer rebellions over boardroom pay. This rule is not infallible, but it applies most of the time.
A company can enjoy an accidental piece of good fortune, which in turn spits out a large number from a mechanical bonus machine, but almost nobody bothers to protest that the executives’ big payday owes as much to luck as skill. Investors are too busy counting their own windfalls.
The latest example is Centrica, owner of British Gas. Only 7% of votes at Tuesday’s annual meeting were cast against a remuneration report that showed that chief executive Chris O’Shea, enjoyed within his overall £4.5m pay packet a thumping annual bonus and long-term rewards in a year in which it would have been virtually impossible for him not to achieve most of his financial targets.
When Russia invaded Ukraine in February 2022, wholesale energy prices soared, turning Centrica’s North Sea gas assets and its 20% stake in the UK’s nuclear generation fleet into cash machines. It became a breeze to hit financial targets that were set pre-invasion. Against a supposedly stretching target of 8.6p for earnings per share for 2022, Centrica delivered four times as much. Targets for cashflow and operating profit were cleared with £2bn to spare.
It is not, of course, O’Shea’s fault that Centrica operates in an industry in which prices, and thus profits and cashflow, can be jolted suddenly by outside forces. In another year, the volatility could work against him. The nonsense lies in pretending the incentive structures represent “pay for performance” in a meaningful sense.
The annual report claims the pay committee “carefully considered the impact of this year’s exceptional movement in commodity prices” and concluded that targets would have been achieved regardless, but it is hard to see how such an exercise could be conducted precisely. The methodology is not transparent.
Fund manager Abrdn, one of the few to vote against the remuneration report, made two further points. First, the three-year incentives were priced off a share price in 2020 that was temporarily depressed by Europe’s initial response to the Covid pandemic. “This has resulted in a windfall award to the CEO valued at £2.26m,” said Andrew Mason, its head of active ownership.
Second, Centrica’s remuneration committee made zero deductions from O’Shea’s annual bonus of £1.42m after the shocking revelations about how British Gas contractors were forcibly installing prepayment meters in the homes of vulnerable customers. “We are concerned that the remuneration committee’s decisions harm the reputation of the company,” argued Mason.
That view seems entirely reasonable, but it was shared by only a small minority. The vast majority saw no problem with a pay report in which the committee chair, Carol Arrowsmith, a remuneration consultant by trade, hinted that she didn’t want O’Shea to repeat his gesture of a year ago of waiving his annual bonus out of sympathy with British Gas customers facing high energy bills.
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O’Shea, to be clear, has done a better job at Centrica than his hapless predecessor, notwithstanding the prepayment meter fiasco. Yet is very hard to see how it adds up to a £4.5m performance in a year in which the storm in the energy market was blowing the company only in a helpful direction. Boardroom pay is always something of a lottery, but this example is extreme.
