Fat cat bonuses like Persimmon’s £100m are outrageous. Axe them | Stefan Stern

It’s not every day that a housebuilder admits something has been badly designed. Even more unusual is the sight of not one but two senior company directors resigning on the grounds of their poor judgment. But the chair of Persimmon, Nicholas Wrigley, and his senior colleague, Jonathan Davie, chair of its remuneration committee, have both quit after acknowledging that the pay deal which will deliver more than £100m to the company’s chief executive, Jeff Fairburn, was flawed.

The mechanism which led to this cash bonanza is something called a long-term incentive plan, or LTIP, which was linked to the company’s share price. In the case of Persimmon, a LTIP drawn up in 2012 is set to shower more than £200m on the top three executives at the firm, and up to £800m in total for the company’s top 150 managers.

The company’s share price was £6.57 when the LTIP was signed off but stands at over £26 today. Ker-ching.

Was it commercial genius on the part of senior management that brought about this startling spike in value? Hardly. It had everything to do with the government’s help-to-buy loan scheme, launched in 2013, which has given an enormous boost to house prices and land values.

Not many people would regard a period of six years as truly representing the “long term”; you would hope any houses Persimmon built would stay up a bit longer than that. But not many ordinary people get to decide what level executive pay is set at. Institutional shareholders are told by company remuneration committees (or RemCos) what they propose to pay their top executives, usually on the advice of consultants.

Most people in this closed, self-reinforcing system are themselves on very high pay. They find these big numbers unremarkable, and are desensitised to how most of us react to them. Not surprisingly, businesses are by and large opposed to the idea of having representatives from the workforce involved in RemCo discussions.

Wrigley and Davie are resigning because, the company says, they realise they should have set a cap on the eventual payout. But these LTIPS were approved by 85% of shareholders. It is true that shareholders have benefited too from the share price rise and dividend flow, yet some are now “shocked, shocked” to discover how much the boss is to be paid.

Perhaps some of the shock is genuine. In truth, some of these elaborate pay structures are so complicated that hardly anyone can understand them, including the shareholders who vote and the executives who profit from them. I know of one professor who asked his PhD students to research these pay contracts, and some of them were simply beyond their comprehension.

The world of fat cat pay is full of myths. In reality big businesses are complicated, and the crucial work is done by tens of thousands of people. Leadership is important, but not so disproportionately important that a couple of people at the top deserve to get paid so much vastly more than everybody else.

Share prices move about for a lot of reasons, very few of which can be traced back to the individual actions of a single person, whatever their level in the organisation. Big decisions are rarely taken by a chief executive on his or her own. Yet this is the bogus premise on which executive pay packages are constructed. Adherents to this mythology refer to it as “performance-related pay”. But it is no such thing: it is mostly luck-related pay.

A 10-year study of FTSE 350 companies carried out by the Lancaster University Management School found only a “negligible” link between the mediocre performance of these companies and the explosion in pay seen at the top. Long-term incentive plans have been the snake oil product driving this machine. It is high time they were axed.

• Stefan Stern is director of the High Pay Centre and co-author of Myths of Management