Gadfly

The $1 Billion Staff Party

Unless you're a Persimmon shareholder or employee, you're not invited.
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Photographer: Simon Dawson

Persimmon Plc caters to the lower end of the U.K. housing market -- its average selling price is a very reasonable 213,000 pounds ($273,000). The rewards the homebuilder is doling out to management and shareholders are rather more lavish.

Under a long-term incentive plan agreed in 2012, about 150 senior executives stand to receive shares equivalent to up to 10 per cent of the company’s issued share capital. The stock has more than trebled since the plan was opened, meaning those options are now worth just less than 780 million pounds. 1 A good chunk of them can be exercised from the end of this year.

Because the management is on track to meet the LTIP’s target for returning cash to shareholders, CEO Jeff Fairburn is sitting particularly pretty: his awards alone are currently worth about 105 million pounds.

Given the sensitivity that surrounds executive pay in the U.K., as well as the concern about the country’s dysfunctional housing market, it’s remarkable how little fuss the out-sized awards have caused.

Persimmon’s chairman reiterated on Tuesday that he has no intention of retroactively amending the remuneration policies. Little wonder: the vast majority of the developer's investors voted to approve the company’s pay policy at its recent annual meeting.

Doubtless investors remain pretty relaxed because they too are profiting handsomely. Persimmon has returned more than 1.5 billion pounds to shareholders since the start of the LTIP, and its first-half results suggest there’s scope to increase pay-outs still further.

The London housing market might be slowing, but Persimmon focuses on the rest of the country, and its order book remains buoyant. The operating margin widened by almost 4 percentage points to 27.6 percent in the six months to June 30, which help lift its net cash position to more than 1.1 billion pounds.  

There's no question Fairburn is doing a decent job -- the company has a knack for acquiring land on the cheap and for keep build costs down, which boosts return on capital employed (this metric rose to a remarkable 47 percent in the latest six-month period.) 2 With management and investor interests closely aligned, what’s not to like?

My discomfort stems from the fact that Persimmon has also enjoyed a massive stroke of luck. The government’s Help to Buy shared equity policy, launched in 2013, has spurred a big jump in new home sales, as intended. Today about half of the developer's customers make use of it.

There’s no question Help to Buy has helped the homebuilder expand sales, and it may also be inflating its margins. Thanks to the government’s help, buyers are able to afford larger homes and Persimmon isn’t under as much pressure to offer sales incentives to buyers. 3

Persimmon's Christmases have all come at once, and there's nothing to suggest the company’s good fortune won’t continue for a while yet -- the Help to Buy policy has cross-party support and won’t expire until at least 2021.

If the New Year celebrations in Persimmon's hometown of York seem particularly raucous this year, you'll know why.

This column does not necessarily reflect the opinion of Bloomberg LP and its owners.

  1. Some employees have a higher strike price, so the amount will be slightly lower.

  2. That's according to the company's definition of ROCE, which differs from Bloomberg's. 

  3. Persimmon insists there’s no difference between selling prices for those using the plan and those who don’t.

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