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Cape Town – Old Mutual defended the proposed payout of 1 000% of base salary for CEO Bruce Hemphill on Thursday, after a report revealed there was a shareholder rebellion brewing.
It comes amid a managed separation policy where the underlying business – Old Mutual Emerging Markets, Nedbank, Old Mutual Wealth and OM Asset Management – will be separated.
The Financial Times (FT) in London said on Thursday that “some of the group’s biggest investors said they were considering a vote against the planned maximum payout for Bruce Hemphill because of the ‘unusual nature and size’ of the offer”.
Hemphill’s base salary in 2016 has been proposed at £900 000 (R20.3m), resulting in income of £9m (R203m) "as part of the long-term incentive plan over the three years the company aims to complete the break-up”, the FT explained.
“The pay framework proposed is unusual and large,” one of the shareholders told the FT. “A figure of 1 000% of base salary is very generous, particularly if the company is split up earlier than the 2018 deadline.”
The shareholders will vote on the plan at the annual general meeting on June 28.
Hemphill's sacrifice for Old Mutual
However, Old Mutual head of corporate affairs William Baldwin-Charles told Fin24 that Hemphill only started his role with Old Mutual in late 2015 with “reasonable expectations that the role would have a more typical FTSE-100 CEO tenure of around five years, and moved his home and family to the UK accordingly”.
“He assessed the group and the strategic options available and recommended the managed separation approach because he felt it was in the best long-term interest of the businesses and shareholders, even though it was not in his own financial interests.”
Under the new policy, which was approved by over 50% of the shareholders, Old Mutual proposes to replace the existing annual Long Term Incentive Plan (LTIP), which currently has a maximum vesting of 250% of base salary per year with a one-off, not to be repeated LTIP of a maximum of 1 000%.
“Under the old plan, he would have been awarded LTIPs in 2016, 2017, 2018 whereas in the new plan it will just be one LTIP,” said Baldwin-Charles.
“Therefore the CEO Bruce Hemphill could earn 1 000% of base salary under the new plan vs 750% under the old plan.
“The reason for replacing annual awards with a one-off is to avoid the unintended consequence of penalising the executives for executing the strategy quickly. In addition, rolling awards with three-year performance periods do not align with a time-bound strategy with a specific end point.”
Conditions need to be met
“For the LTIP to vest at 1 000% a number of conditions must be met in three elements:
- 40% of the award will be assessed on the execution of the managed separation.
- 35% based on alignment of shareholder value
- 25% linked to financial performance of the underlying businesses
“Fifty percent of the final award is released on determination that the managed separation has been completed and 50% is held in a form that will mirror shareholder returns for a 12 month period.
“This structure ensures the executives are incentivised to execute the managed separation in a way that sets up the businesses for sustainable success.
“I would also point out that on average over the last 10 years, LTIPs at Old Mutual have paid out on average just over 50% of maximum (with three years when the LTIP did not pay out at all).”
Reason for the split
Explaining the need to split the businesses, Baldwin-Charles said the evolving regulatory regime in Europe and SA is adding a degree of additional cost, complexity and constraint.
“Furthermore, the current group structure inhibits the efficient funding of future growth plans for the individual businesses, restricting them from realising their full potential.
“These issues will be solved by making each business separate and will result in the creation of significant long-term value for our shareholders.”
The separation, which should be completed by the end of 2018, will result in the phased reduction of central costs, which totalled about £80m in 2015.
