There was much huffing, and a 35% rebellion by shareholders, when AstraZeneca proposed a pay packet for its chief executive, Pascal Soriot, of £18.7m if the company hits its performance targets. The case for the defence was that the pharma firm is a very large company – the biggest in the FTSE 100 index – and has to compete for executives in the US, land of the over-remunerated.
Whether or not you’re convinced by the argument, it feels odd that £8.2m last year for Chris O’Shea, boss of Centrica, owner of British Gas, looks likely to fly through with minimal fuss at Wednesday’s annual meeting. Both the main proxy voting agencies are recommending a thumbs up, and they tend to set the mood.
Yes, £8.2m is obviously a substantially smaller sum than £18.7m but Centrica is less than a 20th of the size of AstraZeneca in terms of stock market capitalisation: £7.5bn plays £190bn. Nor does the energy company need to nod to US pay norms since all its main assets these days are at home – the North Sea gasfields, the 20% stake in British Energy’s nuclear power station fleet and British Gas itself.
O’Shea is seen to have done a good job, it should be said, if one looks beyond the appalling episode with British Gas-appointed prepayment meter fitters (for which he was docked a few quid from his bonus). He inherited a mess in 2020 from his unlamented predecessor, Iain Conn, and made a few strategic calls that were demonstrably correct – reversing the idea to sell the stake in British Energy, for example, and clearing out of a layer of management.
Yet it is also plainly true that a chunk of the recovery in the share price from a bombed-out 30p in April 2020 to 142p today has been driven by a factor entirely beyond management’s control: the surge in wholesale energy prices that followed Russia’s invasion of Ukraine in February 2022. British Gas wasn’t helped particularly, but a rocket was put under returns from the North Sea fields and the nuclear plants.
You can see the effect in the targets set for O’Shea’s bonus for 2023. The earnings per share measure was reset in the middle of year because of “materially better than expected” market conditions, but Centrica still beat the revised targets by a mile. On cashflow, the company exceeded its target by an almighty £1.5bn, which merely demonstrates how much volatility can occur in a commodity-based business. Management may have managed brilliantly, but outside forces had an outsized impact on the numbers.
The tale of targets exceeded by wide margins was the same in 2022, which was why the biggest contributor to O’Shea’s £8.2m pay packet for 2023 was the £5.9m from the three-year incentive plan set at the start of 2021, another age in terms of energy prices.
The timing is not O’Shea’s fault, of course, and no long-term investor is going to grumble about a trebling in the share price over the course of the scheme, the factor that has inflated the value of his incentives. But one hopes some shareholder at the annual meeting asks Carol Arrowsmith, chair of the remuneration committee, to explain this line in her report: “The committee considered whether there have been any windfall gains and determined there were none.” Really? None?
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Surely O’Shea was nearer the mark when he said, when he got a mere £4.5m for 2022, that his rewards are “impossible to justify”. He’s done well to restore much-needed stability to Centrica, but £12.7m over two years is a helluva tally for running what is, even after the share price whoosh, only the 55th largest company in the Footsie.