The thinking behind performance-related pay is that it links executive reward to shareholder returns. This works best in times of growth, but what happens when growth expectations turn out to be too ambitious?
Sanderson Design Group (SDG) is a small (£55mn market cap) luxury interior furnishings company that designs, manufactures and markets wallpapers, fabrics and paints, and is best known for its William Morris wallpapers. The group awards its executives with shares in the form of nil-cost options. These used to depend on four performance conditions: relative total shareholder return, earnings per share, revenue and free cash flow. The measures were subject to a threshold (below which none of the shares under option would vest); a pre-defined stretch target (above which they’d all vest); and a sliding scale inbetween.
In 2020, the remuneration committee had a rethink. “The characteristics of restricted shares better support the business in its execution of strategy and fully aligns executives with the shareholder experience,” its members decided. The difference being that restricted shares don’t have performance conditions – so executives benefit from their company’s progress only through the performance of the share price. That seemed to make the awards less complex than the previous ones.