In the Spotlight – Burberry, the fashion house’s say on pay in focus
CGLytics, a leading global provider of governance data and analytics, looks at Burberry’s proxy statement, in connection with its compensation proxy vote proposals, ahead of its 2019 Annual Meeting of Shareholders (the “Annual Meeting”), scheduled for July 17, 2019
Included in the Agenda for this year is the approval of the advisory remuneration report. At the Annual General Meeting, a total of Nine directors will be seeking re-election at the meeting. Two long Serving directors of the Board have been announced not to be seeking re-election at the meeting and hence will be retiring at the end of the Annual General Meeting. This year, the Board is proposing a total of sixteen ordinary resolutions and three other special resolutions.
The Annual General Meeting of Burberry historically had some stand-offs with shareholders and proxy advisors. The remuneration report for the financial year ended March 31, 2014 received only 47.32% of votes in favor. In 2014, then CEO, Christopher Bailey received a realized pay of GBP 7.5 million, which the company admitted that it was a lot of money but was necessary to retain the CEO. On his appointment, he was also given 500,000 shares in the company, which was worth more than GBP 7 million in 2014. In addition, investors expressed concerns about 1.35 million shares he was allocated before becoming Chief Executive, which had no performance criteria attached to them. Ahead of the AGM, that year, PIRC (Pensions and Investment Research Consultants) advised its members to vote against the company’s 2014 remuneration report.
For the financial year 2015, Christopher Bailey took a pay cut, in which he received a total pay of GBP 1.9 million as compared to GBP 7.5 million in 2014. At their 2017 AGM, the remuneration report for the financial year ended March 31, 2017 had 68.52% of votes in support from shareholders who participated in the AGM. Due to the revolt on the remuneration report, Julie Brown who joined the company as Chief Financial Officer in 2017 decided to waive GBP 2.4 million of the remuneration package she agreed a year prior. This included benefits of a GBP 800,000 share award that related to a potential performance payment from her former employer, Smith and Nephew, which was worth less than the Burberry board had previously assumed. Interestingly, advisory group ISS had recommended shareholders to vote down the remuneration report at the Annual General Meeting, declaring unsatisfaction with Ms. Brown’s pay package.
In line with the UK’s corporate governance code, Burberry submitted its first remuneration policy for shareholders voting at their 2014 Annual General Meeting. The Remuneration policy received 83.92% in support. Before the AGM, The Investment Management Association (IMA), issued a warning about Burberry’s pay policy.
2017 was the last AGM where the remuneration policy was submitted for shareholders’ voting. During the AGM, the remuneration policy had a support of 93.4% votes in favor, which was an improvement on the prior remuneration policy voting outcome.
Ahead of their AGM, the board revised the remuneration policy to avert a possible shareholders’ rebellion. Burberry reduced its executive’s bonus pay and Christopher Bailey also refused his bonus for the 2016/17 financial year. In the Annual report for the financial year ending March 31, 2017, the company disclosed plans to lower the maximum annual salary increase for its top executives from 15% to 10% and proposed that bonus pay outs to be capped at twice the base salary compared to 2.25 times under the previous policy.
In addition, compensation under the executive share plan awards for ‘exceptional performance’ will be reduced from 6 times the salary to 3.75 times, while the maximum award for ‘normal’ performance will fall to 3.25 times the base salary from 4 times under the previous policy. Burberry also reduced pension contributions for new external executive directors from 30% to 20% of salary and scraped ‘sign on’ bonuses. The Shareholding guideline was however maintained at 500,000 shares for the CEO and increased from two times to three times base salary for other executives.
In line with the UK Corporate Code, the remuneration policy is therefore not being submitted for shareholders’ approval given the overwhelming support it received in 2017. The remuneration policy will therefore be put forward for shareholders voting in 2020’s AGM.
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Utilizing CGlytics’ peer composer and pay for performance modeler, we replicated the peer group that Burberry disclosed in its annual report in 2014 and performed a compensation benchmark. The analysis shows that Burberry’s CEO realized compensation was above the median of its peer companies in 2013. In the same year, Burberry’s TSR outperformed its peer companies.
In 2017, Burberry’s CEO compensation practice showed a pay for performance misalignment relative to its peers. The CEO received a compensation package in the amount of GBP 19 million while the peer median pay was GBP 9 million. The company’s total shareholder return for 2017 was 26.6% compared to the median TSR of 32.4% for its peers.
For the financial year 2018, the CEO of Burberry, Marco Gobetti’s, received a total payment of GBP 4.3 million. This is above the median of the FTSE 100 CEO pay of GBP 3.7 million and Burberry’s peer group which is at GBP 4.2 million.
Burberry’s Long-term incentive plan performance metrics are currently weighted as; 50% on Revenue, 25% each on Adjusted Profit before Tax and Adjusted Retail Return on Invested Capital (ROIC).
When comparing Burberry’s CEO pay practice relative to its disclosed peer group, using CGlytics’ pay for performance modeler, it shows a pay for performance misalignment between Revenue and compensation.
Burberry’s CEO 2018 total realised pay ranks below median at the 46th percentile whiles its revenue ranks bottom quartile at the 23rd percentile.
Comparing Burberry to its FTSE 100 industry peers, the company again shows a pay for performance misalignment. The CEO’s total realized pay ranks 71st percentile (upper quartile) while revenue ranks in the 29th percentile (bottom quartile).
The analysis performed by CGLytics, may suggest that the company is over-compensating their CEO relative to its peers and the industry.
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