Dominic Lawson: Big bonuses the fault of former Chancellor and help-to-buy

Owl says: While Lawson blames Osborne it should be noted that May and Hammond have not closed the loophole … which could easily be done …

“At first he said he deserved his £110m bonus, and resisted all the pressure to assign a large chunk of it to charity. Then he said he would give some of it to good causes, but not how much (“a private matter”). Finally, on Friday, after three months of hectoring by the media and investors, he said he’d forgo . . . £25m.

I’m referring to Jeff Fairburn, chief executive of the housebuilder Persimmon and the principal beneficiary of a remarkably generous share-based incentive scheme that has sprinkled more than £500m of equity around 140 of the company’s “top individuals” as if from a fairy godmother’s wand. Except it doesn’t come out of thin air, but by diluting all the ordinary shareholders’ stakes in the business.

Their representatives — pension fund managers, principally — have spent those past three months moaning about it. But when the incentive scheme was drawn up in 2012 — linking the rewards to share price performance and dividend payments — it was approved by 85% of shareholders. So Fairburn’s resistance is understandable; and, indeed, Persimmon’s investors have done fine — since 2012 their shares have quadrupled in value.

But the main reason is not the ingenuity of Fairburn and his colleagues. No, if there was a fairy godmother in this, it was George Osborne. As chancellor, he launched the help-to-buy scheme, which economically crazy but politically astute subsidy supports about half of Persimmon’s recent house sales. We as taxpayers are not directly funding those £500m worth of bonuses, but we have underwritten the personal mortgages that made that colossal windfall possible. Don’t mention it, Jeff: happy to help.

The person most annoyed by this is actually a lot richer than Fairburn — and another housebuilding boss. Steve Morgan, the head of Redrow, complained: “For somebody who has not taken a salary for 20 years it sticks in the craw, being called a greedy housebuilder because of that one company.” And why has Mr Morgan not taken a salary for 20 years? Because he founded Redrow in the 1970s and is worth about £830m. He would be a billionaire (according to the compiler of The Sunday Times Rich List) had he not passed £226m of Redrow shares to his charity, the Steve Morgan Foundation, which supports disadvantaged and disabled people in north Wales and northwest England.

Here we see, in instructive proximity, the sort of wealth that compels admiration and the sort that provokes contempt. That stark divergence is not because Morgan has been philanthropic. It is because he has created his own business and, at the outset, would have been at personal risk if it had not worked out (perhaps, like so many entrepreneurs, he had offered whatever he owned as security for bank loans). Fairburn had a good story to tell, too: he began in the building trade as a youth training scheme apprentice, studying to become a quantity surveyor while mixing concrete. But he did not create the firm of which he is, after all, just another employee: he is taking the rewards of entrepreneurialism without the risks.

He is not, in the true sense of the word, a capitalist. But Morgan is. And the point is that while there has in the decade since the credit crunch been a gale blowing the sails of those who denounce “capitalism”, the public hostility is actually — and rightly — directed against those who are not capitalists (as Karl Marx defined them), but who have seized capital from its owners. After all, that is what the discredited banking executives, both here and in America, did. They leveraged the capital of which they were merely managers, to generate vast bonuses for themselves: when that blew up the banks, the exploded corporate balance sheets were rescued by the taxpayer . . . while the executives kept all their winnings.

In his latest book, Skin in the Game (which I review today) Nassim Nicholas Taleb calls this “the Bob Rubin trade”, in (dis)honour of the former US Treasury secretary who kept his $120m compensation from Citibank: “When the bank, literally insolvent, was rescued by the taxpayer, he didn’t write any cheque — he invoked uncertainty as an excuse.”

The risk — to the market system now under attack from the unreconstructed Marxists at the helm of the British Labour Party — is that the bonny baby of entrepreneurial endeavour will be thrown out with the dirty water of executive self-dealing.

Much of that self-dealing — which I first wrote about as long ago as 1989 in a Spectator cover piece titled “How the bosses help themselves” — is promoted by the argument that it makes senior managers behave more like proper owners, rather than mere time-servers. Specifically, the executive compensation committees of FTSE companies have argued that through the awards of share options, the interests of those managers are aligned with the investors who, collectively, own the businesses.

It is a theory generally accepted and, like many such established doctrines, false. The ordinary shareholders have actually paid for their equity, so if things go pear-shaped, they stand to lose what they have invested; and those who have created businesses can lose everything, even their homes. But share options are free. There is an upside, but as no capital is at risk, no real downside.

One result is that share option schemes have encouraged undue risk-taking by executives, for example by borrowing heavily to finance acquisitions — which is what happened at Carillion. It also encourages a more short-term approach to business-building than a true owner would adopt: share option schemes tend to last for a few years, not the decades that a good business should be measured in.

I should confess, at this point, to having been a beneficiary of just such a scheme. When I was an executive of the Telegraph group I was assigned, for the first and only time in my life, some share options . . . and within just a few months they were most unexpectedly realised when the majority shareholder decided to buy out everyone else. Without any effort on my part — other than just continuing to do my job of editing a newspaper — I was suddenly presented with a cheque sufficient to pay off my mortgage.

I was delighted, of course. But it also felt wrong, somehow. I suppose I might feel the same way if I won the national lottery, although that is most unlikely to happen, and not just because of the odds: I don’t enter it. At least the lottery winners have paid for their stake. We should expect our best-remunerated business leaders to have done the same.”

Source: Sunday Times (pay wall)

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