Persimmon: dividends are outstanding but the CEO’s pay - really?

Shareholders are raking in the dividends, but should Persimmon be rewarding the CEO with more money?

Article updated: 2 March 2018 10:00am Author: Michael Baxter

The numbers

The share price has risen some 170 per cent in five years, dividends have come pouring in and are expected to become even greater, so why, oh why, were shareholders so up in arms about the pay award to the boss?

Profits are up 25 per cent at Persimmon in 2017 compared to the year before. Dividends are now expected to be 125p a share greater over the period to 2021, which would take total dividends from 2012 to 2021 to £13 a share. And from now to 2021, are expected to be 815p a share - not bad for a company whose share price is 2,583p. You do the maths, that’s a yield of around 32 per cent over the next few years, and there was me thinking any return in excess of the current 0.5 per cent a year interest rate, set by the Bank of England, was pretty good.

The pay award

Yet, despite this remarkable performance, shareholders huffed and puffed until they blew the remuneration policy down - now the CEO, Jeff Fairburn’s pay, in the form of shares, is capped at £75 million - he was on course for £100 million.
But so what! As Persimmon itself said: “The incentive plan had been a significant driver of the company’s outstanding performance.”

If shareholders win, why can’t the lowly workers, by that I mean the CEO and fellow board directors, win too?

After-all, a big contributory factor to Persimmon’s stellar performance was the government’s help-to-buy scheme, accounting for half of sales, and that was surely all down to Mr Fairburn.

The average sales price rose too, which helped boost profits - well done to the team at Persimmon, thanks to your efforts house prices keep going up.

Indeed, the rises in house prices over the last few years that have done so much to boost the company’s profits were down to the Persimmon board.

You may have noticed - there was a degree of sarcasm in the above words.

Persimmon has worked out as a great bet for investors - and the dividend plans certainly look attractive.

But pay awards for the boss should boil down to two factors. Firstly, how much of that performance would have occurred if the company had randomly picked its CEO from a list of reasonably bright but not especially well-paid professionals working in that industry? It does seem to me that a good deal of the profits were down to factors beyond the control of the company.
Secondly, even if Mr Fairburn was uniquely qualified - something I doubt, though I am sure he is very clever and works exceedingly hard - would he really have been less motivated if his pay award had been, say, a quarter of the level originally proposed?

There is plenty of research - the first TED talk I ever saw explained it well - that pay awards have limited effect in incentivising us. Sure, we expect to be paid well, but people are often incentivised to put in that extra effort for more nebulous reasons - to do with supporting the team and feeling good about yourself.

Disease

The idea, which is far more commonly accepted in the US, of paying individuals millions of pounds/dollars a year to run a company they played no role in founding, is based on a false premise - and it is a major problem as, in an era when wages are rising so slowly, it is driving social discontent.

Some credit

Don’t get me wrong - there is much about Persimmon that I like. I am impressed with the way it grappled with the problem of a shortage of skilled labour by the creation off site manufacturing centres, creating, for example, timber frames and roof tiles - in the process bringing automation to the house building business.

As for the future prospects - the Persimmon dividend is attractive, unless house prices crash, and I have given up predicting that, profits should carry on rising.

But I do like to see companies innovate. In the era disruptive technology that is upon us, only innovators will survive. And in the house-builder business, innovation lies with making as much as possible off site, realising economies of scale and automating. Persimmon seems to be taking a lead in that area too. I am just not convinced it is necessary to pay the boss £75 million to achieve that.

These views are those of the author alone and do not necessarily reflect the view of The Share Centre, its officers and employees.

Michael Baxter portrait photo
Michael Baxter

Economics Commentator

Michael is an economics, investment and technology writer, known for his entertaining style. He has previously been a full-time investor, founder of a technology company which was floated on the NASDAQ, and a director of a PR company specialising in IT.