2 NZX-listed companies, Sanford Ltd & Restaurant Brands NZ Ltd, introduced the latest in executive incentive plans yesterday.
The 2 schemes are markedly different from each other. Sanford’s matches earnings against the cost of capital while Restaurant Brands’ has a share price target.
The Sanford scheme looks long-termish (5 years), but the company hasn’t mentioned what happens after the first payout period. The Restaurant Brands scheme gives the chief executive 3 years to achieve the target, with a big one-off prize for success – not really a long-term incentive, although it might take him some time to ramp the share price up through better operations.
The Sanford long-term incentive plan is based on lifting the underlying operating profit to a set percentage of the company’s weighted average cost of capital. In contrast, the typical property sector incentive of the past (and for some, present) was based on lifting gross assets.
This new scheme works in shareholders’ interests by raising profit over costs, whereas the property sector scheme had no relationship to shareholder interests.
Sanford chairman Jeff Todd said the objective of the incentive plan for its chief executive, Volker Kuntzsch, was to offer performance share rights for progressively improving Sanford’s underlying operating profit to a level approximating 130% of its weighted average cost of capital over a 5-year period.
To start the scheme, Sanford has granted Mr Kuntzsch 53,097 performance share rights, each entitling him to one ordinary share in Sanford on exercise. For him to exercise these rights:
- Sanford’s average return on funds for the 2014, 2015 & 2016 financial years must achieve certain predetermined levels in relation to the 5-year objective, and
- Mr Kuntzsch must remain employed by Sanford for 3 years.
Mr Kuntzsch won’t have to pay anything when these shares are allotted to him. Mr Todd said the benefits provided under the plan were capped at 30% of Mr Kuntzsch’s fixed annual remuneration, which was set at market levels.
The other novelty is that, whereas most executive share schemes pay out with dilutive newly issued shares, Sanford will establish a trust which will acquire shares on market to meet the share obligations under the plan.
Mr Todd said Mr Kuntzsch had agreed that, following exercise of the performance share rights and for so long as he remained employed by Sanford, he would only sell the number of shares necessary to satisfy his tax obligations on exercise of the performance share rights, unless the board of directors specifically agreed otherwise.
Restaurant Brands’ board announced its incentive scheme for chief executive Russel Creedy after completing a review of his remuneration package.
Under the terms of the scheme if, in the 2-year period starting on 25 July 2015, Restaurant Brands’ closing share price is at or exceeds $4 for 40 consecutive trading days, Mr Creedy will be paid a one-off $1 million net cash bonus. He has to stay for the next 6 months to get it.
The share price hasn’t been anywhere near $4 lately. Back at the end of July 2012 it was at $2.12, and in May last year it went over $3. Since then it’s meandered in a 65c range, hitting $3.34 in June, dropping back to $3.14 last Friday. Today it picked up 6c to $3.20.
There are enough sub-clauses in the Restaurant Brands plan to make a payout – or non-payout – contentious enough for the company & its No 1 employee to spend the $1 million arguing over what should be taken into account.
Mr Creedy will be entitled to payment of the bonus if a full takeover offer (or analogous transaction) is successful at or above $4/share during the 2-year assessment period, but again, he has to stay on for the next 6 months (subject to certain exceptions).
The board may exclude or adjust closing share prices if it considers it necessary to “fairly & equitably address any exceptional or unusual circumstances”. In addition, the board must make any adjustments to the scheme which it considers necessary to fairly & equitably take into account certain corporate actions such as variations to Restaurant Brands’ share capital and material business acquisitions or sales.
Attribution: Company releases.