Compensation tied to a company’s share price means that executives share in the pain or gain of shareholders. But since this encourages executives to migrate to where the best share price prospects are, how do companies react when their share price declines?
A while back, boohoo was on a roll. It absorbed PrettyLittleThing, a connected fast fashion company; and it picked up Karen Miller, Coast, Oasis, Miss Pap, Warehouse and, in early 2021, the Debenhams and Dorothy Perkins brand, Wallis and Burton. Since then, the cost of freight has risen and it has worked to combat low supplier wages and reduce the environmental impact of its products. To grow, it has had to ramp up marketing to a cohort of customers who are accepting more products on approval and returning more, all while being competitive on price. It all adds up to squeezed margins – and negative earnings per share for the year through February 28, 2022.
So not a good year for boohoo. According to Iain McDonald, who chairs the compensation committee, financial targets were not met due to “disruption to the international delivery proposition” and “significant unforeseen pandemic-related cost inflation”. This wiped out three quarters of the annual bonus. The rest would be paid as “management successfully integrated the new brands” and delivered its “Agenda for Change” (a euphemism for “supply chain issues”). But the wrong targets had to be set, as he feared such a low bounty ‘won’t reflect the tremendous progress made’ in the year to February 2022, which included an improved ‘international proposal’ whose aim is to “generate sales potentially in excess of £5 billion”.
Discretionary choice of the compensation committee, which overrode the bonus formula. Administrators increased the payout from 25% to 75%, effectively tripling it, with two-thirds in shares to be held for two years. This restored the total salary for the year for John Lyttle, the chief executive, from £0.9m to £1.4m, a level comparable to the £1.6m he had received the previous year. The same was done for the CFO; and other “high performing executives” received similar proportions. Rewards for failure? Well, yes, but in fairness, the two founding directors forfeited their bonuses entirely, which left them with a 62% pay cut. They also suffered a drop of more than two-thirds in the value of their substantial stakes in boohoo during the year.
The bonus hike was meant to hang on to key people, and McDonald’s says their long-term stock awards need to be revamped for the same reason. As this column noted last September, fifteen senior executives could split up to £150m if boohoo’s share price exceeds £3.64 by June 2023. And Lyttle at he alone could receive up to £50m if he goes over £2.50 in March 2024. The loophole? Stock prices are rarely correlated with executive achievement – prices can be altered (as McDonald’s implicitly concedes above) by external factors beyond management’s control. Since the dizzying outlook at the time these programs were put in place, boohoo’s share price has fallen to less than £1, and McDonald’s now modestly says they ‘may not reach the levels originally hoped’. He plans to let them wither and wants executives to receive additional stock awards equal to twice their salary, as well as bonuses of up to twice their salary, both subject to contractual performance conditions. Shareholders will be asked to approve the proposals at the June 17 General Meeting.
Maybe we should face reality. It seems that boohoo’s imperative for market share has pushed some UK competitors, such as Missguided, into the ground. Yet despite this, as demand falters with inflation, it must spend more on marketing to combat declining visits to its brands’ websites. It’s against Shein, which is said to be the biggest online fast fashion company in the world. Shein’s extraordinarily low prices are partly due to its data-driven apparel design and fluid supply chain, but its lack of transparency has sparked allegations of low wages, long hours, labor children and the exploitation of the environment. In the United States, while delivery delays hampered boohoo, Shein was spurred on by former President Trump’s trade war: China’s response was to scrap export tariffs, and since its import duties import only applied to higher value shipments, Shein’s direct sales to US customers get free. Chinese companies can save money because it is notoriously difficult to hold them accountable. Effective government actions to ensure a level playing field could help.
Boohoo’s fundamental challenge is to determine what is changing customer behavior. If the change is structural rather than temporary, a new strategy will be needed, for example, to focus marketing efforts on a less volatile population. This would require more than a new compensation structure for the top team. Different skills – and people – may be needed.