Ex Persimmon CEO Mike Farley's £20m Bonus Windfall.

[New Home Expert]

Now it's Persimmon directors turn feed at the bonus trough!

"The test of our progress is not whether we add more to the abundance of those who have much,
it is whether we provide enough for those that have too little."  Franklin D Roosevelt

Reward for failure? Mike Farley, the former CEO of Persimmon Homes, is to collect nearly £20m in shares this December. This is his part of a 10-year bonus scheme approved by shareholders in 2012. The first payout of £240m will be shared by at least 140 senior managers in a scheme that could be worth around £620million, provided the target to return £1.9bn to shareholders by 2021 is met.
These are known as Unapproved Share Option Plans, as opposed to HMRC approved Company share option plans where the benefits cannot exceed £30,000 in value.

Persimmon favourable financial performance since 2011 will mean that Farley, who retired in April 2013, will be able to exercise an allotment of 966,400 shares on 31 December 2015 netting him £20million, under the deal agreed by Persimmon's board in 2012.

A spokesman for Persimmon said:
"The scheme was approved by shareholders in 2012. This is a long-term plan, which is designed to drive out-performance. Since it was initiated, build volumes have grown 48% and shareholders have seen £734m in returns."

Obviously the "out-performance" does not include Customer Care - Persimmon are one of just two major housebuilders rated just three stars by their customers - or Quality - Persimmon, despite the number of homes they build each year, only managed to employ six NHBC Quality Award winning managers in 2015 - down 80% since 2010.  A truly dreadful "performance" from their new homebuyers' point of view!

Among others receiving the windfall are current CEO Jeff Fairburn, who is in line to receive 934,992 share options, worth £19m at Friday's share price, while finance director Mike Killoran will collect 1.3m share options worth £26.8m. Nigel Greenaway, boss of Persimmon's southern division, will be in line for 595,980 options worth £12.27m. Unlike Farley, they will all have to wait until December 2017 before they can receive their cash windfall!

The salary of CEO at the FTSE100 companies is now on average, 183 times more than their full time employees.
This is obscene, but at Persimmon Homes, it would take a site manager 380 years to earn Jeff Fairburn's £19m bonus.

Persimmon currently have around 390 active sites. Rather than paying millions in bonuses to the already wealthy, unproductive few, surely the £240million earmarked to them would be better deployed to increase their site manager's salaries and incentivising them to build better quality new homes, which would improve the company's reputation and reduce the cost of post-occupation remedial works.  If just Farley's undeserved, unearned £20m bonus windfall was split between the company's site managers, each would receive £51,282, in effect more than doubling their wages. If all of the first bonus was given to Persimmon site managers, each would receive £615,380.

The announcement of Persimmon's staggering award comes after a 54% rise in its share price over the past year with the company's profits being boosted by the Government's 'Help to Buy' scheme aimed at first-time buyers, reduced stamp duty for the majority of buyers along with a relaxation of regulations on affordable housing and planning.

Earlier this month it was announced that Tony Pidgley, boss and co founder of Berkeley Homes, received £23.3m last year, the start of a series of payouts to their top executives that could total to £500m over the next six years.

Whilst the level of greed at the top of Britain's big housebuilders shows no signs of limitation, the UK is in breach of its own United Nations human rights commitment to provide people with adequate homes because the housing problem is so serious.

[The Prophet]

At first glance the headlines do make Persimmon directors seem greedy but the share options are a gamble on the Persimmon share price being higher when the options are exercised.  Even then, the Taxman does quite nicely out of it - a kind of 'Help to Buy' subsidy rebate for taxpayers?

Under Persimmon's 2012 long-term incentive plan (LTIP) about 140 senior managers, including executive directors, will be granted options based on the success of the capital return plan.

The options offer the right to purchase shares at an agreed price. Under Persimmon's plan, the initial option price is equal to the market value of a share, or £6.20 if higher, but will decrease by a sum directly corresponding to the amount the company pays out in dividends.  That means their price could fall to zero if the pay-out plan is completed fully by the end of 2021.

Persimmon Annual Report 2013 states:

"…..Awards will be granted with an initial option price equal to the market value of a share, or £6.20 if higher.

Subject to performance, up to 40% of options may be exercisable at 31 December 2017. The balance of options may be exercisable on the earlier of 31 December 2021 and the date the performance condition is achieved in full. After sales to meet tax, no more than 50% of shares received upon exercise of an option may be sold within 12 months of the date of exercise.

The Committee may waive this condition for good leavers and in exceptional circumstances. A clawback arrangement under the Company’s long term incentive plans allows the Company to recover share awards which have vested as a result of an error or misstatement, or if a Director is guilty of gross misconduct which substantially affects the Company’s financial performance or reputation."

The maximum number of shares that can be awarded under Persimmon Group’s  2012 Long Term Incentive Plan is:
Chief Executive:              4,832,000     £101,647,400*
Finance Director:             3,382,400      £71,531,810*
Group Managing Director: 2,416,000      £50,823,700*
Non-Board Level:             1,540,200      £32,400,109*
 
(* Cash value based on Persimmon share price at close 28 August 2015 of 2103.63p)

On exercise of the option, income tax and NI will be charged on the difference between the market value of the shares at the date of exercise of the option and the option exercise share price. So the directors will pay 45% income tax and 12% national insurance as soon as they exercise the option and receive the shares.
In addition they will (at present) have to buy the shares, paying up to 620p a share as well.

In December, Farley's 966,400 shares option will cost him £5,991,680 - at the £6.20 option exercise price.
The shares are worth £20,329,480 at the current £21.03 share price.

So tax payable would be 45% income tax on £14,337,800 (20,329,480 – 5,991,680) = £6,452,010
NI payable at 12% would be                                                                                  £1,720,536
                                                                                                                        £8,172,546
Value of bonus at a share price of £21.03 is:
Value today minus the buying cost plus tax and NI
£20,329,480 – (£5,991,680 + £8,172,546) = £6,165254

Therefore, if Persimmon share price falls by £6.37 to £14.65, the net value of the bonus would have been wiped out and below this price level, the shares are actually costing him money!  And he is having to pay a total of £14,164,226 out upfront to get £6,165,254 bonus based at today's prices. Worse, under the scheme he has to hold at least 50% of the shares for 12 months during which the price could crash, especially when interest rates rise!  (suffering Persimmon new home buyers live in hope!)

If he holds onto the shares he will also have to pay 28% capital gains tax (CGT) on any increase in their value when he sells.
Any dividends received will also be subject to 45% tax.

Who would want to be a retired Persimmon CEO?