TAstraZeneca caused an uproar when it proposed to pay its chief executive, Pascal Soriot, £18.7 million if he met performance targets, sparking a 35% backlash from shareholders. The defence argument was that the drug company was one of the largest in the FTSE 100 index and had to compete for executives in the US, where salaries were too high.
Whether or not you’re convinced by this argument, it seems odd that the £8.2 million paid last year to Chris O’Shea, chief executive of Centrica, the owner of British Gas, is likely to pass with almost no fuss at Wednesday’s annual general meeting. Both major proxy voting bodies have recommended in favour, which tends to lighten the mood.
Admittedly, £8.2m is significantly less than £18.7m, but in terms of market capitalization Centrica is less than one-twentieth of AstraZeneca’s, and £7.5bn is the equivalent of £190bn. The energy company also doesn’t have to adhere to US wage standards, as all of its major assets these days are home based – North Sea gas fields, a 20% stake in British Energy’s nuclear power plants, and British Gas itself.
Apart from a nasty episode with prepayment meter installers appointed by British Gas (which cost him a few pounds off his bonus), O’Shea can be seen to have done a good job. He took over a mess from his much-missed predecessor Ian Cohn in 2020 and clearly made some of the right strategic decisions, such as reversing the idea of selling shares in British Energy and cleaning up the management team.
But it’s also an indisputable fact that much of the recovery in the share price from its massive 30p collapse in April 2020 to 142p today has been driven by factors entirely outside management’s control, namely the rise in wholesale energy prices following Russia’s invasion of Ukraine in February 2022. British Gas hasn’t been particularly helped, but revenues from its North Sea oil fields and nuclear power plants have been rocket-like.
The effect is also visible in O’Shea’s 2023 bonus target. Earnings per share metrics were reset mid-year due to market conditions being “significantly better than expected”, but Centrica still beat its revised target by a wide margin. On cash flow, the company beat its target by £1.5bn, but this just goes to show how much volatility can occur in a commodity-based business. Management may have had the controls in place, but external forces had a huge impact on the numbers.
The talk of significantly exceeding targets was the same for 2022. So the biggest contributor to O’Shea’s £8.2m salary for 2023 was £5.9m from a three-year incentive plan set up at the start of 2021, a different era in terms of energy prices.
Of course, the timing isn’t O’Shea’s fault, and long-term investors won’t complain that the share price tripled over the life of the plan, inflating the value of his incentives. But I expect that at the AGM, a shareholder will ask Carol Arrowsmith, chair of the remuneration committee, to explain a sentence in her report that reads, “The committee considered whether there were any windfalls and determined that there were none.” Really? None?
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O’Shea would certainly have been right on the money when he said it was “impossible to justify” his pay when he will receive just £4.5m in 2022. He has done well to bring some much-needed stability back to Centrica, but even after the share price has soared, £12.7m over two years is an outrageous amount to run the Footsie’s 55th largest company.
