LONDON -- One subject guaranteed to anger investors is excessive executive pay. This anger turns to rage when taxpayers see seven-figure packages awarded to senior executives at Britain's bailed-out banks, such as Royal Bank of Scotland (NYSE: RBS) and Lloyds Banking Group (NYSE: LYG).

Battling against big bonuses
However, fed-up investors are now exercising their rights as shareholders to vote against excessive executive remuneration. Since the U.S. introduced new "say on pay" legislation, U.S. institutions have been much more active in having their voice heard. Recently, this led to the majority of investors in Citigroup (NYSE: C) voting down the $15 million pay package of Vikram Pandit, the bank's CEO since 2007.

On this side of the Atlantic, institutional investors have made their disapproval known over the huge package of pay, shares, options, and cash awarded to the American chief executive of Barclays (NYSE: BCS), Bob Diamond. "Diamond Bob" is in line for total rewards of 25 million pounds this year, with investors threatening to shoot down this package at this week's annual general meeting.

A good sport
Frankly, corporate greed and director avarice are so widespread these days that it's almost impossible to find a bonus scheme that is designed to be fair to shareholders, rather than to enrich executives.

However, there is one FTSE 250 company that has an extraordinarily generous bonus scheme that is incredibly tough on its chief executive. This mid-cap marvel is Sports Direct International (LSE: SPD), and its founder and executive deputy chairman is Mike Ashley, the billionaire owner of Newcastle United Football Club.

This morning, Sports Direct issued a trading update in advance of its year end April 29. This revealed total sales for the nine weeks ending March 25 rose by more than 13% to nearly 268 million pounds. Over the same period, gross profit rose by 14% to almost 100 million pounds.

Sports Direct's core retail division did even better, producing a 16% uplift in sales to nearly 233 million pounds and a 15% increase in gross profit to more than 85 million pounds.

Given the ongoing weakness on Britain's battered high streets, these results really do "shoot out the lights."

One brilliant bonus scheme
Today, the board of Sports Direct confirmed that the group is now certain of hitting its full-year "super stretch" target of underlying earnings before interest, tax, depreciation, and amortization of 225 million pounds.

As a result of hitting this super-stretch target, Sports Direct will seek investors' approval at its 2012 AGM to offer a "Super-Stretch Executive Bonus Share Scheme" to Ashley. This resolution will grant Ashley 8 million shares, to vest in 2018, subject to meeting these two performance criteria:

  1. The group meets "very stretching" EBITDA targets in all of the next three years.
  2. Its ratio of net debt to EBITDA is 1.5 or less in the financial year ending 2015.

These EBITDA targets are 270 million pounds in 2012-13, 290 million pounds in 2013-14, and 340 million pounds in 2014-15.

What's amazing about Ashley is that he doesn't take a penny in salary from Sports Direct. Instead, by delivering value to shareholders via rising earnings, he can earn large bonuses -- but always in shares, never in cash. By doing this, Ashley perfectly links his personal remuneration to shareholder earnings, which is the ideal bonus structure.

Also, in an unusual transaction nevertheless approved by shareholders, the FTSE 250 firm has handed over 86.8 million pounds to Ashley by buying 32 properties previously owned by him.

Shares for staff
What's more, Sports Direct is more generous to its workers than it is to its founder. The group introduced an employee bonus share scheme in July 2009, linked to stretching targets for EBITDA and net debt.

Sports Direct met both targets in 2010 and 2011, thus triggering a payment this summer of 25% of their salaries in shares to 2,000 of the retailer's leading staff (store managers and other leaders). This works out at an average of 5,000 shares each and around 8 million shares in total. In addition, a further 75% of salary -- 12,000 shares each and 26 million in total -- will be handed over in summer 2013.

Given the success of the 2009 EBSS, Sports Direct introduced another for 2011. This has EBITDA targets as follows: 215 million pounds in 2011-12, 250 million pounds in 2012-13, 260 million pounds in 2013-14, and 300 million pounds in 2014-15. Note that all of these targets are much lower than Ashley's super-stretch targets previously listed.

If all four EBITDA targets are met, then 3,000 employees could receive an average of 2,500 shares in the summer of 2015, a total of 8 million shares. Also, in the summer of 2017, another 26 million shares will be awarded, averaging 7,500 per leader.

Bumper bonuses
As I write, Sports Direct's share price is up 7 pence to 292 pence, which values the group at nearly 1.7 billion pounds. Thus, the 8 million shares Ashley is in line to receive this year are worth the thick end of 24 million pounds.

That's a huge payout to one man, even more so given that is he is neither chief executive nor chairman. Even so, given that Sports Direct's share price is up nearly 50% in the past 12 months, I'm sure investors will happily vote to give Ashley this huge windfall!

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