Bank bosses would hate this bonus scheme


Sports Direct’s bonus plan is very generous to its staff, but much tougher on its founder.

One subject guaranteed to anger investors is excessive executive pay. This anger turns to rage when taxpayers see seven-figure packages awarded to senior executives at Britain’s bailed-out banks, such as Royal Bank of Scotland (LSE: RBS) and Lloyds Banking Group (LSE: LLOY).

Battling against big bonuses

However, fed-up investors are now exercising their rights as shareholders to vote against excessive executive remuneration. Since the US introduced new ‘say on pay’ legislation, US institutions have been much more active in having their voice heard. Recently, this led to the majority of investors in Citigroup (NYSE: C.US) voting down the US$15 million pay package of Vikram Pandit, the bank’s CEO since 2007.

In Britain, institutional investors have made their disapproval known over the huge package of pay, shares, options and cash awarded to the American chief executive of Barclays (LSE: BARC), Bob Diamond. ‘Diamond Bob’ is in line for total rewards of £25 million this year, with investors threatening to shoot down this package at this week’s annual general meeting (AGM).

A good sport

Frankly, corporate greed and director avarice are so widespread these days that it’s almost impossible to find a bonus scheme that is designed to be fair on shareholders, rather than to enrich executives.

However, there is one FTSE 250 company which has an extraordinarily generous bonus scheme that is incredibly tough on its chief executive. This mid-cap marvel is Sports Direct International (LSE: SPD), and its founder and executive deputy chairman is Mike Ashley, the billionaire owner of Newcastle United FC.

This morning, Sports Direct issued a trading update in advance of its year-end on 29 April. This revealed total sales for the nine weeks ending 25 March rose by more than 13%. Over the same period, gross profit rose by 14%.

Sports Direct’s core retail division did even better, producing a 16% uplift in sales and a 15% increase in gross profit.

Given the ongoing weakness of Britain’s battered high streets, these results really do ‘shoot out the lights’.

One brilliant bonus scheme

Today, the board of Sports Direct confirmed that the group is now certain of hitting its full-year ‘super-stretch’ target of underlying EBITDA (earnings before interest, tax, depreciation and amortisation) of £225 million.

As a result of hitting this super-stretch target, Sports Direct will seek investors’ approval at its 2012 AGM to offer a “Super-Stretch Executive Bonus Share Scheme” to Mike Ashley. This resolution will grant Ashley eight million shares, to vest in 2018, subject to meeting these two performance criteria:

1. The group meets “very stretching” EBITDA targets in all of the next three years; and

2. Its ratio of net debt to EBITDA is 1.5 or less in the financial year ending 2015.

These EBITDA targets are £270 million in 2012-13, £290 million in 2013-14 and £340 million in 2014-15.

What’s amazing about Ashley is that he doesn’t take a penny in salary from Sports Direct. Instead, by delivering value to shareholders via rising earnings, he can earn large bonuses — but always in shares, never in cash. By doing this, Ashley perfectly links his personal remuneration to shareholder earnings, which is the ideal bonus structure.

Shares for staff

What’s more, Sports Direct is more generous to its workers than it is to its founder. The group introduced an Employee Bonus Share Scheme (EBSS) in July 2009, linked to stretching targets for EBITDA and net debt.

Sports Direct met both targets in 2010 and 2011, thus triggering a payment this summer of 25% of their salaries in shares to 2,000 of the retailer’s leading staff. In addition, a further 75% of salary — 12,000 shares each and 26 million in total — will be handed over in summer 2013.

Bumper bonuses

As I write, Sports Direct’s value is nearly £1.7 billion. Thus, the eight million shares Mike Ashley is in line to receive this year are worth the thick end of £24 million.

That’s a huge payout to one man, even more so given that is he is neither chief executive nor chairman. Even so, given that Sports Direct’s share price is up nearly 50% in the past 12 months, I’m sure investors will happily vote to give Ashley this huge windfall!

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A version of this article, written by Cliff D’Arcy, originally appeared on fool.co.uk

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