easyjet manager bonus scheme
EASYJET has scrapped its traditional executive bonus scheme and replaced it with one based on only two measures — return on equity and a hoped-for entry into the FTSE 100 group of elite companies.
The new bonus scheme, thought to be the only one of its type at a UK-quoted company, was quietly adopted by the company at an extraordinary meeting at its Luton headquarters 10 days ago.
Quoted British companies usually have long-term incentive plans based on calculations of total shareholder returns compared with a group of peers.
But Sir Colin Chandler, Easyjet’s chairman, said that method was inappropriate because there were not enough quoted low-cost airlines to make a meaningful judgment, and that comparison with a broader group of companies would not be appropriate.
Instead, Easyjet will in future judge senior executives — the scheme applies to its top 50 managers, including recently appointed chief executive Andrew Harrison — by a single measure, the company’s return on equity.
“Return on equity is a very widely used financial benchmark which is directly comparable not only with other airlines, but also with companies in most other industries,” said Chandler.
Last year Easyjet managed a 7.5% return on equity. If the company hits 15% within three years, the managers will receive 100% of their salaries in Easyjet shares. There are intermediate targets along the way that will result in proportionately smaller rewards for smaller gains in return on equity.
The target return-on-equity figure will be calculated by dividing post-tax profit in a given year by average shareholders’ funds in the year.
The airline has also given its managers another star to aim for. If the company becomes a member of the FTSE 100 for at least six months before the end of September 2008, they will qualify for a bonus in shares equivalent to their total annual salary.
But there is a catch. To qualify for the FTSE 100 award, executives will have to stay in employment with Easyjet for an additional three-and-a-half years after the airline has made it into the top 100 British companies.
And Easyjet still has some way to go before it is in danger of paying out the FTSE 100 award. It would have to more than double its current market capitalisation to enter the elite group. It closed on Friday at 258¾p, equivalent to a market value of £1.14 billion. Today the threshold for FTSE 100 membership is £2.4 billion.
The company has also put one other obstacle in the way of executives who might be tempted to cash out quickly in the event that they recieve share bonuses. All members of the airline’s management board, who report direct to the chief executive, will not be allowed to sell their shares until they build up to a value equivalent to their annual salary.
In a circular to shareholders ahead of the annual meeting, the company’s remuneration committee defended its novel pay strategy. “The committee is aware that the approach it intends to adopt in relation to the performance conditions is unusual. However, the committee is firmly of the belief that this approach is very appropriate for Easyjet,” the circular said.
Fuel prices are at historic highs, but transport analysts remain cautiously bullish about low-cost airline stocks, and those of Easyjet and Ryanair in particular.
Chris Avery, airline analyst at JP Morgan, said: “Although high fuel prices must have an impact on earnings growth at some stage, the reality is that fuel-price surcharges by the network airlines are creating a positive revenue environment for low-cost carriers.”