So It Turns Out That $800 Million Persimmon Staff Party Is Not OK

(Bloomberg Gadfly) -- Nicholas Wrigley, chairman of British homebuilder Persimmon Plc, has fallen on his sword over the furor surrounding a company bonus plan that's set to pay out slightly less than 600 million pounds ($800 million) to 150 top employees.

His decision to go is right. But it doesn't change the fact that senior Persimmon executives are going to get extraordinarily rich, thanks in part to the generosity of British taxpayers.

I beefed about Persimmon's bonus plan back in August.  The plan didn't have the flexibility to accommodate the extraordinary impact that government home-purchase subsidies would have later on Persimmon's share price and its capacity to pay dividends, which in turn affect the size and timing of potential bonuses.

"Help to Buy" accounts for about half of Persimmon sales. In addition to propping up demand, it means buyers can afford a bigger home. But, even in August, Wrigley -- who's also vice-chairman of Rothschild London -- was still insisting he was "very comfortable" with the plan and rejected any suggestion he should introduce a retroactive cap, saying this would be akin to "shooting oneself in the foot". 

So It Turns Out That $800 Million Persimmon Staff Party Is Not OK

But, whether he was aware of it or not, he'd already hobbled himself. Approving a bonus plan with a potentially unlimited payout is daft. That's not just because it leaves the company open to criticism that it's tone-deaf to public concern over excessive executive pay. Massive payouts can also be counterproductive if some staff decide they're rich enough to walk out of the door.

Some 40 percent of the payout is due at the end of this year, with the remainder set to follow in 2018.  A simple cap would have avoided those risks, one that was set high enough to motivate employees but low enough not to make the company fodder for tabloid outrage. Chief executive Jeff Fairburn's awards are worth about 109 million pounds currently, which does seem somewhat on the high side. 

To be clear, this isn't management making hay while investors suffer. With dividends reinvested, shareholders have made a more than 600 percent total return since the start of 2012. Indeed, it's a pity that Fairburn's pay is getting all the attention because he seems competent. Persimmon's balance sheet is in good shape, it's acquired land cheaply and its profitability is among the best in the business -- despite selling homes that on average cost a modest 213,000 pounds. 

The lesson here for corporate pay committees is to expect the unexpected and set limits on potential largess. If not, you're priming the shotgun for a foot injury.

This column does not necessarily reflect the opinion of Bloomberg LP and its owners.

Chris Bryant is a Bloomberg Gadfly columnist covering industrial companies. He previously worked for the Financial Times.

  1. Persimmon has since clarified that the sums involved are somewhat lower than originally anticipated. 

To contact the author of this story: Chris Bryant in Berlin at cbryant32@bloomberg.net.

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