It Pays to Work at Tesco

LONDON -- By any standards, supermarket Tesco (OTC: TSCDY) is one big business.

It has a near-30% market share in the U.K., operates about 5,000 stores worldwide, and employs more than 500,000 people in 14 countries. What's more, in its 2012 financial year, the retailer recorded sales of 72 billion pounds and a profit before tax of 3.8 billion pounds.

As I write, Tesco shares trade at 305.6 pence, down 4.3 pence, which values the group at 24.6 billion pounds. In short, Tesco is one mighty outfit.

Rewarding staff
To reward employees for their hard work in a difficult year, Tesco's British workers are set to share a bonus pot of more than 110 million pounds. Over the past five years, Tesco has paid out more than 500 million pounds from this all-employee bonus scheme.

However, despite achieving record sales and profits, Tesco failed to meet some of its U.K. performance targets. As a result, its top 5,000 managers will receive a reduced yearly bonus. This amounts to 16.9% of the maximum payable under their bonus scheme.

Furthermore, executive directors will pocket only 13.54% of the maximum payable amount. Also, chief executive Philip Clarke turned down his 372,000 pound personal bonus, saying: "I wasn't satisfied with the performance in the U.K., and I won't take the bonus."

Digging into directors' pay
Digging deeper into Tesco's remuneration report, something unusual comes to light.

For once, it appears that a PLC's board directors have shared their shareholders' pain, following Tesco's first profit warning for more than 20 years. To show you what I mean, here are the salaries and other cash awards paid to Tesco's directors in 2011 and 2012:

As you can see, total executive cash payouts in Tesco's latest financial year were below 7.9 million pounds, versus almost 16.2 million pounds for the previous year. In other words, cash payouts to executives were more than halved from one year to the next, down 51%.

What's more, given Tesco's worst U.K. performance for two decades, the retailer has been clearing out its board, with three of the seven directors listed above either retired or set to retire. Oddly, Tesco's best-paid director was not CEO Philip Clarke. It was Tim Mason -- Clarke's deputy and Tesco's chief marketing officer -- partly thanks to his 555,000 pound expat allowance (282,000 pounds after tax).

However, a very different picture emerges among Tesco's nine nonexecutive directors. In total, they received almost 1.5 million pounds in FY 2012 -- a pay rise of 230,000 pounds, or 18%. Thus, it seems that Tesco's executive directors have been punished for the poor performance of its shares over the past 12 months. Or have they?

Cash is just the beginning
Of course, the gravy train that is an FTSE 100 board position goes so much further than mere cash. Directors' remuneration has become a fantastically complicated field, partly thanks to remuneration consultants who exist purely to bid up directors' contracts and, thereby, their own fees.

As a result (and in line with many other major firms), Tesco's directors pick up far more in extra benefits than they do in boring old cash. For example, here are the increases in pension transfer values for the supermarket's directors in 2011-12:

As you can see, thanks to their membership of an exclusive final-salary pension scheme that other workers can only dream of, these directors saw huge increases in the value of their pension pots in a single year. These uplifts range from more than 1.4 million pounds for Richard Brasher to more than 3.8 million pounds for CEO Philip Clarke. In total, the combined values of these seven executive directors' pension pots leapt by 13.7 million pounds in Tesco's latest financial year. This sum equates to about 173% of the cash payouts listed in my first table. In other words, these pension increases were worth far, far more than pay.

Free shares and options
As well as seven-figure pay and pensions, Tesco executives also receive a bewildering array of executive share options, free shares, and incentive shares awarded under LTIPs (long-term incentive plans).

As well as contributing to the all-employee Sharesave (my favorite savings plan), Tesco's executive directors have been granted more than 10.9 million share options. However, almost all of these are "underwater," because their exercise prices are above Tesco's current market price. Right now, these options remain worthless until Tesco's share price rises by 25% to 75%.

Despite the slump in Tesco's share price in 2012, its directors won't need to take on a second job. My final table shows the total shares and options owned by these seven executive directors:

In total, these directors own more than eight million Tesco shares, very few of which they bought themselves. Instead, the vast majority of these share awards came from free and incentive shares granted to them by Tesco's remuneration committee. Today these shares are worth 24.5 million pounds, which is a nice chunk of equity in the firm. In addition, these "lucky seven" Tesco bosses own more than 21 million options to buy Tesco shares, the value of which is set to soar if they get the U.K.'s No. 1 supermarket back on track.

Is this fair?
I am somewhat taken aback by the riches showered on Tesco's top bosses. My reason is simple: Tesco's share price has crashed in the past year. Just short of 12 months ago, on May 31, 2011, Tesco shares hit their 2011 closing high of 419 pence. Today they trade below 306 pence, down 27% from their FY 2012 peak.

Hence, in my view, Tesco's board directors have been vastly overpaid to preside over one of the firm's biggest share-price collapses since the dark days of 2003!

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