The absurd arithmetic behind Centrica boss’s bonus

Photograph: Gary Calton/The Observer

A year ago, Chris O’Shea was in solidarity mode. The chief executive of Centrica, owner of British Gas, didn’t take an annual bonus because it would be “wrong” to do so when so many customers were on the wrong end of soaring energy bills.

The financial hardships haven’t obviously become any less hard over the past 12 months (especially for those unfortunate enough to be visited by a British Gas-appointed prepayment meter fitter) but O’Shea will take his full whack this time, including an annual bonus of £1.4m within an overall tally of £4.5m.

Examples of FTSE 100 chief executives waiving a bonus two years in a row are as rare as hen’s teeth, so we shouldn’t be surprised. And, in O’Shea’s case, it seems the chair of Centrica’s remuneration committee, Carol Arrowsmith, wasn’t wholly impressed by last year’s little gesture. “We cannot expect to attract and retain leaders in the future if we do not meet our commitment to recognise and reward the performance and talent of our people,” she wrote in the annual report.

Related: Boss of British Gas owner sparks outrage with £4.5m pay packet

Arrowsmith could more usefully have asked what, actually, this bonus scheme was rewarding. The targets for a bumper payout weren’t merely achieved, but cleared by absurdly wide margins for the reason everybody knows: Russia invaded Ukraine and wholesale energy prices soared.

While Centrica didn’t make much money from British Gas, its North Sea gas assets and its 20% stake in the UK’s fleet of nuclear power were perfectly positioned to benefit from the market-wide volatility. Returns exceeded wildest expectations. Thus the target for earnings per share – comprising 37.5% of O’Shea’s bonus formula – very quickly became a breeze. It was 6.1p with a maximum set at 8.6p. Actual outcome: 34.9p.

Or, even more absurdly, look at the target for cash and debt, which falls within the “balanced scorecard” that made up another 37.5% of the bonus calculation. The remuneration committee thought O’Shea would be doing well to get Centrica to a position of net cash of £12m. The achieved figure was £1.2bn. In the same vein, targets for cashflow and operating profit were cleared with £2bn to spare.

O’Shea may indeed have shown “outstanding leadership, drive and determination”, as Arrowsmith maintains, but it is also true that he could have spent 12 months on the golf course and still hit most of his targets. The bonus scheme became a winning lottery ticket.

Now that wholesale energy prices are falling, it is possible that luck will work against O’Shea this year and the next set of targets will become impossibly out of reach. In that respect – and if O’Shea had not banged on in the past about how he’s not motivated by money – one could almost sympathise with his decision to take the lolly. He might do a terrific job this year and get zero bonus.

One can have no such sympathy for Arrowsmith. She’s a remuneration consultant by trade and this remuneration scheme was a shocker.