Retail giant claims to be challenging fat cat pay excess with scrapping of controversial incentive scheme
Tesco has overhauled its pay policy for top executives as it tries to head off a repeat of last year's embarrassing shareholder revolt when almost half its investors failed to back its remuneration report.
The new approach, revealed in the retailer's annual report published on Tuesday, will see the scrapping of an incentive scheme previously enjoyed by Tim Mason, Tesco's US boss. His pay became the focus of much of last year's shareholder ire, with investors arguing it was excessive considering the big losses being racked up by Tesco's US start-up, Fresh & Easy.
Tesco said that it was making changes after a review and consultation with shareholders.
The retailer's annual report stated: "In light of the renewed focus on a collegiate approach to remuneration, together with Mr Mason's appointment to the roles of deputy chief executive and chief marketing officer, it has been agreed that Mr Mason will no longer be eligible for awards under the US annual or long-term incentive programmes. Mr Mason will therefore no longer participate in the US LTIP [long-term incentive plan] and the 2m shares granted to him in 2007 will lapse."
Despite the changes, under which Tesco's current four long-term incentive plans will be merged into one single plan, Philip Clarke, the group's chief executive, who started his job in March, can earn an annual long-term bonus of up to 275% of his £1.1m salary, and a further 250% through a short-term bonus.
Meanwhile, Mason has been awarded a bonus of 80% of his £832,000 salary – despite losses at Fresh & Easy rising by 10% to £181m last year. The company said that the bonus was a reward for hitting "strategic goals" such as growing US sales and improving customer feedback.
The package means that Mason remains the second-highest-paid Tesco executive, with total pay of £3.1m, down from £4.3m, and trailing only Sir Terry Leahy, the former chief executive. Of the company's eight executive directors, only Lucy Neville-Rolfe, its head of corporate and legal affairs, was paid less than £2m, with a £1.8m package.
Having cashed in Tesco shares worth £1.8m during 2010, Mason will now be forced to rebuild his personal shareholding in the retailer, as it has fallen below new levels imposed by the remuneration committee for "full participation in the long-term performance share plan".
The debate over boardroom pay had already been reignited this week with a survey showing that chief executives of blue-chip companies enjoyed a median pay rise of 32% last year, compared with a 7% rise in the FTSE 100, and a 2% increase in workers' pay, according to the pay consultancy MM&K and corporate governance group Manifest.
Sarah Wilson, chief executive of Manifest, said: "[Tesco's move] will encourage shareholders to keep on plugging away [on executive pay], as the effort is worth it. Is it linked to the fact that there is a new chief executive and the fact they got a spanking at last year's AGM? Who knows? Tesco deserves credit, but the devil will be in the detail."
One detail involves the retailer seeking to bump up the chief executive's potential 275% long-term bonus in "exceptional circumstances". The annual report added: "To ensure that we have sufficient headroom to grant awards in exceptional circumstances, in line with usual practice, we are seeking shareholder approval to increase the maximum award opportunity under the PSP [performance share plan] to 350% of base salary."
Tesco's report also revealed that Leahy received £4.2m in the year to February, down from £5.2m the previous year. His pay included a base salary of £1.4m.
Meanwhile, the supermarket's 225,000 staff are to share a £110m bonus pot after its annual profits haul of £3.8bn. Under the chain's bonus scheme, which paid £105m last year and £98m in 2009, workers who have been with Tesco for at least a year will be paid shares worth about 3.6% of salary up to a maximum of £3,000. All staff are eligible from part-timers to directors and the chief executive.