Sticking by their man

Following a R7bn writedown of Australian asset David Jones, eyebrows are raised over executive pay policy

Two of Woolworths’ top five shareholders — the PIC and Allan Gray — are backing its directors’ new pay scheme, despite an accounting quirk that could result in executives scoring big on the back of a R7bn impairment hit.

Last month, Woolworths decided to write down the value of its Australian asset David Jones by almost R7bn, not long after its remuneration committee decided to review the weighting of performance conditions for its executives’ share plan allocations.

It proposed, among other things, that return on capital employed be increased to 30%; that its total shareholder return weighting be cut to 20%; and that the weighting of headline earnings per share remain at 50%.

In any other year, the decision to make return on capital a bigger chunk of your executive pay scheme would hardly raise eyebrows.

In fact, says RECM chairman Piet Viljoen, “I can’t think of any other reason why you would run a business.” Return on capital as a metric for sizing up management teams “should be highly prominent”.

But in light of the impairment, as one fund manager put it: “Imagine I buy shares for you and they halve. You’re down 50%. I say sorry. Because I’ve lost money you don’t pay me a performance fee and your R1,000 is now worth R500. So we write down your portfolio to

R500. And the share then goes up to R600. Bingo — a profit, so I claim performance fees even though you are still down R400. With Woolies, it’s return on capital. Remuneration on writtendown capital.”

Put another way, if you take R100 invested capital and make, say, R20 in earnings but then write off your capital by R30 to R70: your earnings remain at R20, but the denominator is now R70 – flattering earnings growth as it comes off a smaller base.

One analyst, who asked not to be named, says it’s critical that future incentives are only worked out from the new base.

But the PIC, which voted in favour of the remuneration changes at Woolies’ last AGM, says: “The inclusion of return on capital employed is appropriate and it is a good indicator for the alignment with shareholders.”

Deon Botha, the PIC’S head of corporate affairs, is of the view that the David Jones write-off “will not give undue influence on executive directors’ remuneration.

“This is the matter we shall deal with in our engagement with the company.”

Meanwhile, Allan Gray portfolio manager Duncan Artus says: “We don’t think the remuneration committee, which is chaired by Tom Boardman [the former Nedbank CEO], would use a written-down net asset value base on which to calculate the return on capital employed for the incentives.”

Allan Gray has only recently been buying into Woolworths, given the “large underperformance” of the share – it lost 9% during 2017 against a 14% gain for the general retailers index.

Artus says Allan Gray views Woolies’ remuneration policy “as better than average” but is concerned about the level of CEO Ian Moir’s base pay.

Moir scooped R18.67m as base salary in the 2017 financial year – an increase of 13.6% on his 2016 base pay, notwithstanding the company’s poor performance on the market. Artus says Allan Gray would “prefer more of his remuneration to be in long-term incentives”.

Allan Gray has been in contact with Boardman and chairman Simon Susman. Artus says: “I doubt anyone on the board is happy they have written off R7bn. We think they will do the right thing.”