A $99 Million Bonus Makes Parting Such Sweet Sorrow

(Bloomberg Opinion) -- British house-builder Persimmon Plc is parting ways with its CEO. Jeff Fairburn had been the lucky recipient of what is thought to be the biggest bonus in British corporate history, potentially worth more than 100 million pounds before public outrage saw it cut to a mere 75 million pounds ($99 million.)

The company still insists that his performance made him worth it. But this doesn’t look like value for money. 

Persimmon says replacing Fairburn was a decision due entirely to the “distraction” over his pay, which it says hurt both the house-builder’s reputation and the CEO’s ability to do his job. It had nothing to do with his “successful” track record. While other businesses might ditch their leader for bad performance, Persimmon stresses that theirs merely hit his bonus targets and that’s what inflated his pay. Had the board been wise enough to cap the rewards properly, there wouldn’t have been the fuss and he’d still be in the job.

A $99 Million Bonus Makes Parting Such Sweet Sorrow

This may be true, but it hardly excuses the company for the episode that led to Fairburn’s well-upholstered departure. 

Persimmon has tripled pretax profit since 2013, but the bonus uproar has taken a toll. The structure of Fairburn’s bonus, which entitled him and about 140 senior managers to options worth up to 10 percent of Persimmon’s share capital, was so egregious that it has damaged both the firm’s standing and the smooth running of its management. The chairman resigned last year, as did the head of the remuneration committee, and the huge bonuses were capped. But public ire failed to die down, and now the CEO is out. These are costs.

A $99 Million Bonus Makes Parting Such Sweet Sorrow

Persimmon’s logic implies that you get what you pay for: Only an outsized bonus could have driven such outsized returns. But this is unconvincing. Luck plays a big part in CEO performance. Fairburn’s tenure was made much easier by low interest rates, which boosted U.K. property prices, and taxpayer subsidies for home-buyers. 

British companies are slowly waking up to whether their leaders offer value for money, even if they’re hitting performance goals. It’s about time. Targets that favor taking money out of the business — Persimmon paid out about 1.5 billion pounds in dividends over the past three years to meet its bonus objectives — may satisfy shareholders in the short term, but companies need investment, too. A rising share price and pretax profit don’t always paint the full picture.

A $99 Million Bonus Makes Parting Such Sweet Sorrow

It will now be up to the next Persimmon CEO to prove that long-term value can be delivered with less institutionalized greed. If they manage, it won’t just be Persimmon’s top shareholders who’ll be happy. Fairburn is still entitled to a second chunk of share options tied to his pay package. That might be a price worth paying for Persimmon, but this should really be the end of this culture of excess.

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

Lionel Laurent is a Bloomberg Opinion columnist covering finance and markets. He previously worked at Reuters and Forbes.

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