What’s the Story?

Troubled drinks giant Diageo heard from Glass Lewis last week that they are recommending a vote against the remuneration report at the next AGM.

The recommendation was invoked by a joining package of the impending new interim CEO Nik Jhangiani, which included £8.5m in non-performance shares.

Glass Lewis say that this is excessive, in light of the non-performance requirement. Diageo explain the £8.5m share award is a buy-out of lost value on leaving his prior employment for a vital new hire.

Industry sources flag that while the share price has fallen c.35% in recent times, the fall has stalled following the new hire.

Why Does it Matter?

Hiring top talent into a difficult situation is tricky. Good people are well paid elsewhere they are familiar with the levers to generate shareholder value and often drive high performance pay outcomes.

Strong talent will tend to back themselves to deliver, but it is reasonable that the value they bring is rewarded correctly. To be attractive the joining promise must include both buy-out value for money lost on the move, and major future upside.

Pay for performance matters, and the bigger the pay, the more it matters. By any view £8.5m is a lot of pay, so much is expected as we see from Glass Lewis

But that is not the story. The £8.5m non-performance shares are a buy-out of lost value on the move, where investor views are well known:

• No Golden Hellos

• Buy outs must match the loss in value

• With matched vesting timing

Getting the buy out amount and structure correct is a minimum for joining discussions to move on to the performances pay story.

Glass Lewis seems to have conflated these two separate issues. Or was Diageo insufficiently clear? Either way it is unfortunate as it detracts from how new talent can refocus the business and create future value; with strongly aligned incentive pay.

Newspoint View

Troubled companies facing headwinds need fresh talent to re-frame the vision and future prospects. But this is the exact point at which shareholders are agitated by major investment loss. Their own bonuses are dented by the negative results. Are they irritated? Yes! And some.

Joining a troubled ship while the storm still blows is a big risk for executives. The market reply is often Upper Quartile pay or more, with a strong skew towards base pay. That is tempting, but a better choice is a clear buy-out offer and major post joining incentives sharing the future value creation.

The Diageo and Glass Lewis story seems all about the buy-out element; and flags once again how company and investor communications are vital to the smooth operation of top pay arrangements.

What is not reasonable is to expect top talent to take career and pay risk - with attendant leaver loss - without attractive compensation. Top pay is a deal between talent and capital - both sides should win.

Executive Compensation and Incentive Design

Please feel free to email or call:

Damian Carnell - [email protected] +44 (0) 7989 337118

VA Bec Bostock - [email protected]

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