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 £8,172,546Value 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?