A crazy share scheme that offers no incentive and doesn’t retain staff

This company had good intentions, but things have gone badly wrong. What’s more, this expert is against plans for a new strategy.

An employee incentive scheme made redundant by a slump in AO World (LSE:AO.) shares will be reset at a lower price if shareholders give the go-ahead at a meeting later this month.

Shares need to hit 523p for AO’s Value Creation Plan to reward staff, but after a year in which earnings have fallen sharply, the former FTSE 250-listed stock is 91% below the required level at 43p.

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AO wants the plan to start funding at 100p in order to ensure that executive directors and around 3,600 staff are incentivised. However, voting advisory group Glass Lewis is concerned by the potential for excessive payouts driven by a single benchmark of the share price and has advised shareholders to vote against the plan and AO’s updated remuneration policy.

AO World

When: 8am, Wednesday, 28 September.

Where: 5A, The Parklands, Lostock, Bolton, Lancashire, BL6 4SD.

How to participate: Shareholders can submit questions on the AGM resolutions electronically before the meeting to 2022AGM@ao.com. Those unable to attend the meeting in person can use the online voting service at www.signalshares.com. The deadline for proxy voting instructions is 8am, Monday 26 September. More AGM details can be found here.

Who’s in the chair? Geoff Cooper, the former chief executive of Travis Perkins was appointed to the board in July 2016.

How did the company do in the year to 31 March? The online electricals retailer generated revenues of just under £1.6 billion, which represented a fall of 6% on a year earlier but was 52% higher on the pre-pandemic period. Underlying earnings fell to £8.5 million, from £64.4 million and £22 million in 2020 and 2021 respectively, due to the impact of increased staff costs during Covid as well as higher marketing and logistics expenses. The basic loss per share was 6.33p, against a profit of 3.73p in 2021. There was no dividend award.

How have shares performed? Down 70% to 87.35p. The company raised £40 million from a placing at 43p a share in July and shares closed on Thursday at 45.2p.

How much is the boss paid? Salary increases of 3% were awarded in April, taking the pay of co-founder and chief executive John Roberts to £490,795 and chief financial officer Mark Higgins to £370,285. The AO incentive plan awarded 15% of the maximum opportunity, handing Roberts a further £71,745 in cash and £142,958 in shares deferred for three years. Roberts, who owns around 20% of the company, received total remuneration for 2021/22 of £610,820, down from £976,655 the previous year. 

How did last year’s AGM go? The remuneration report was approved with 93.70% of votes in favour, while the binding resolution on the remuneration policy got 97.62% support.

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What’s in the new remuneration policy? The three-year policy was only approved at last year’s AGM, but is changing to reflect the company’s exit from Germany and strategic focus on profitable growth and cash generation in the UK. The remuneration committee intends to re-balance the AO incentive plan so that 60% of the award is based on financial measures rather than 70% previously. The remaining 40% will be based on a strategic transformation measure and stakeholder impact measures.  

And the Value Creation Plan? The scheme, which covers the whole workforce, is significantly underwater as the share price threshold for anything to vest is 523p. AO’s remuneration committee chair Shaun McCabe said: “It is therefore neither incentivising nor retaining our people.” The plan will continue to have a maximum value of £300 million, which is capable of being achieved at a £6 billion market cap, but in order to incentivise and reward employees from the current share price AO is proposing the scheme will begin funding at a price of 100p. As before, 30% of the plan value will be allocated to the two current executive directors and chief operating officer, capped at a total payout of £20 million for each director. Roberts has committed to give any shares received under the scheme to charity. The remaining 70% is allocated to current and future employees. 

What’s the view of voting agencies? Glass Lewis continues to be unhappy about the Value Creation Plan’s reliance on share price and its potential for excessive payouts driven by market forces rather than company or management performance. Whilst recognising that the scheme received strong support at the 2020 and 2021 AGMs and is open to all employees, the voting advisory group said it cannot support the changes. It has recommended shareholders vote in favour of the annual remuneration report but against the resolutions on the new remuneration policy and the Value Creation Plan.

How’s the company doing on diversity? The recent resignation of Luisa Delgado as a non-executive director has left one woman on the board, representing 17% of its membership compared with 29% in 2021. Senior management is 26% female and there is no ethnic diversity at either level. The company supports the Hampton-Alexander and Parker reviews and is committed to increasing female and ethnic representation on its board.

Babcock International

When: 2pm, Monday 26 September (originally Monday 19 September).

Where: Grosvenor House Hotel, Park Lane, London W1K 7TN.

How to participate: Questions in advance of the meeting should be submitted to groupsecretariat@babcockinternational.com. Proxy voting can be done through www.babcock-shares.com, with a deadline of 2pm on Thursday 22 September. More AGM details can be found here.

Who’s in the chair? Ruth Carnie, whose engineering career spanned four decades at the oil giant Shell, has been in the role at Babcock International Group (LSE:BAB) since July 2019. She’s also on the board of Rolls-Royce.

How did the company do in the year to 31 March? Revenues rose 5% to £4.1 billion as the company’s recovery from Covid disruption and its improved profitability in marine, land and aviation resulted in earnings per share of 30.7p in the first year of the company’s turnaround plan. The previous year’s loss per share was 24.6p, when the performance was impacted by significant balance sheet write-downs. During the year Babcock generated disposal proceeds in excess of its £400 million target. No dividend was declared.

How have shares performed? Up 42% to 324.5p (320.2p on Thursday).

How much is the boss paid? David Lockwood’s salary of £816,000 is unchanged for the 2022/23 financial year. His total remuneration for 2021/22 came to £1.975 million, which included £967,000 from the annual bonus scheme after a better-than-expected cash flow performance led to an award worth 80% of the maximum opportunity. Lockwood has deferred the 60% of annual bonus usually paid in cash into shares for one year.

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What’s the view of voting agencies? Glass Lewis recommends shareholders vote in favour of the annual remuneration report.

How did last year’s AGM go? The remuneration report was approved with 87.95% of votes in favour.

How’s the company doing on diversity? Women accounted for three of the nine boardroom roles, but Kjersti Wiklund is due to retire after the AGM. The company said it is committed to meeting the Parker Review target on ethnic diversity.

Baltic Classifieds

When: 9am (BST), Wednesday 28 September.

Where: Saltoniškių st. 9b, LT-08105 Vilnius, Lithuania.

How to participate: Proxy voting instructions should be returned no later than 9am (BST), Monday 26 September. Questions in advance of the meeting should be sent to cosec@balticclassifieds.com. More AGM details can be found here.

Who’s in the chair? Trevor Mather, chief executive of Auto Trader between 2013 and 2020.

How did the company do in the year to 30 April?Baltic Classifieds Group (LSE:BCG), the FTSE 250-listed owner of online classifieds portals in Estonia, Latvia and Lithuania exceeded guidance at the time of its IPO by growing revenues 21% to 51 million euros (£44.2 million). Adjusted operating profit lifted 20% to 38.5 million euros (£33.4 million) and adjusted earnings per share by 86% to 6.40 euro cents (5.55p). A full-year dividend of 1.4 cents (1.21p) is due to be paid on 14 October. 

How have shares performed? The 165p a share IPO valued the company at £825 million on 30 June. Shares fell 20% to 132p in the financial year (145p on Thursday).

How much is the boss paid? The salary of Justinas Šimkus has increased 21% to 302,500 euros (£262,121). This includes a 10% pay rise for executive directors in line with most of the workforce. The improvement from 250,000 euros (£216,630) also takes into account the unwinding of salary discounts put in place to manage costs when the business transitioned to a UK listed company. The planned readjustment, which was disclosed in the IPO prospectus, should see the chief executive receive a salary of 350,000 euros (£303,280) by 2026. Total remuneration for Šimkus in the financial year of the IPO came to 224,000 euros (£194,100).

What’s the view of voting agencies? Glass Lewis notes that remuneration for executive directors is aligned with the lower quartile of the FTSE 250 index.For this reason, and given the phased nature of the increases, it does not believe the significant rises in fixed pay warrant shareholder action. It recommends voting in favour of the annual remuneration report and the binding resolution on the company’s first remuneration policy, which includes the adoption of a performance share plan offering a maximum opportunity of 250% of base salary.

How’s the company doing on diversity? There were two female directors on the seven-strong board, but the appointment of non-executive director Jurgita Kirvaitienė after the year-end means the company is compliant with corporate code requirements. The company is focused on meeting the recommendations of the Parker Review to have one or more directors from a diverse ethnic background.

Kainos

When: 10.30am, Wednesday 28 September.

Where: Kainos House, 4-6 Upper Crescent, Belfast, BT7 1NT.

How to participate: Proxy votes can be cast electronically via www.signalshares.com but must be received no later than 10.30am on Monday, 26 September. More AGM details can be found here.

Who’s in the chair? Tom Burnet, who was appointed at Kainos Group (LSE:KNOS) in September 2019 and is also chair of the Baillie Gifford US Growth Trust.

How did the company do in the year to 31 March? The IT provider, which specialises in digital services and the Workday platform, lifted revenues by 29% to £302.6 million during a 12th consecutive year of growth. Adjusted profits rose 3% to £58.8 million as margins moderated due to increased investment. Adjusted earnings per share lifted 4% to 38.1p and a final dividend of 15.1p for payment on 28 October is due to bring the total for the year to 22.2p. This is 21% lower as the previous year included a special dividend of 6.7p a share.

How have shares performed? Down 11% to 1,323p (1,393p on Thursday).

How much is the boss paid? Brendan Mooney, who joined Kainos in 1989 as a trainee software engineer, is on an annual salary of £225,000. His annual bonus for 2021/22 was £198,000 based on 59% of the maximum opportunity. Long-term incentives granted in 2018 vested at 100% of the total and generated a further £196,000, taking his total for the year to £645,000. The highest paid executive was Richard McCann, who got £707,000 in his dual roles of chief financial officer and chief operating officer.

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What’s in the new remuneration policy? The long-term incentive plan will now have a three-year vesting and two-year holding period. A minimum shareholding requirement of 200% of annual salary over a four-year period will be introduced for executive directors. The maximum annual bonus has been capped at 150% of salary.

What’s the view of voting agencies? Glass Lewis recommends shareholders vote in favour of the annual remuneration report and the binding resolution on the new remuneration policy.

What happened at last year’s AGM? The remuneration report was approved with 96.7% of votes in favour.

How’s the company doing on diversity? A third of the board is female, with the proportion of women in the company overall at 33% compared with an industry average of 19%. The company is yet to meet the recommendations of the Parker Review to have one or more directors from a diverse ethnic background by 2024.