Why Persimmon's chairman was right to quit over bonus scheme backlash

It's pretty rare to see a company chairman resign when something goes wrong in a business.

Invariably, it is the chief executive, the chief financial officer or the chief operating officer that carries the can.

Today, though, Persimmon (Frankfurt: 882058 - news) has announced its chairman, Nicholas Wrigley, is stepping down following anger from shareholders over a bonus scheme that could net the housebuilder's three top executives £200m.

Jonathan Davie, the head of Persimmon's remuneration committee, is also stepping down.

The news comes after unhappiness at payouts due to Jeff Fairburn, the chief executive, Mike Killoran, the finance director and David Jenkinson, the managing director, under an executive share option scheme that was signed off in 2012.

The notional sum due to the trio under the scheme, as at the end of November, was £232m. The award was described by the Financial Times last month as "even by the standards of UK boardrooms…spectacularly tactless".

It is likely that a number of shareholders in Persimmon, the UK's largest housebuilder by stock market value, agreed.

Royal London Asset Management, one of the few to have spoken publicly on the matter, called the scale of the remuneration "excessive" even though Persimmon's performance had been "impressive".

So why did the directors qualify for such large payouts?

The issue dates back to 2012. That year's long-term incentive plan for Mr Fairburn - who was then managing director - and his colleagues paid out if the company achieved a certain level of returns to shareholders and also included provisions that discouraged management from borrowing aggressively or taking risks.

It was apparently very popular with investors at the time.

What no-one could have foreseen was the way in which the housing market recovered.

In 2012, most of the UK housing market was still in the doldrums, with sales volumes down some 37% on the 2007 pre-crisis peak.

Mortgage approvals for much of the year were even below those of 2011. And house prices were still falling, with the Nationwide house price index recording falls of more than 1% in each of the final three quarters of the year, making 2012 the second worst year (after 2009) in the last quarter-century.

What changed things was the Help to Buy scheme, launched by the-then Chancellor, George Osborne, that July.

It offered lenders cheap funding, provided they passed it on to borrowers, and much of it ended up in the housing market. With (Other OTC: WWTH - news) housing demand pumped up by the scheme but supply not rising nearly so strongly, house prices rocketed and so did the profits of housebuilders.

Persimmon's earnings per share in 2016 were almost four times the 2012 number.

Few builders returned as much of these windfall profits to investors as Persimmon. A promised £1.9bn return of cash to shareholders between 2012-2021 was raised by £860m last year and by a further £77m this year. That is why the 2012 scheme has paid out as generously as it has done.

Why has this made investors so sour? Mainly because the sheer scale of the pay-outs means Persimmon is going to have to pay out millions more shares than it expected to.

Existing investors will, as a result, see their shareholdings diluted.

Persimmon said today: "The board believes that the introduction of the 2012 Long Term Incentive Plan has been a significant factor in the company's outstanding performance over this period, led by a strong and talented executive team.

"Nevertheless, Nicholas and Jonathan recognise that the 2012 LTIP could have included a cap. In recognition of this omission, they have therefore tendered their resignations."

Resignations of chairmen, when things go wrong, are relatively rare.

A chairman's main role is to run the board, ensure it is functioning effectively, while also ensuring the voice of shareholders is properly heard.

Operational failings are not the chairman's responsibility and so it is unusual for them to go in such circumstances.

That is not to say it does not happen. For example, Sir George Jefferson resigned as BT's chairman in 1987, admitting the company was not offering a satisfactory level of service to its customers.

More recently, Sir Richard Broadbent announced in 2014 he was stepping down as chairman of Tesco (Frankfurt: 852647 - news) , following the discovery of a £263m back hole in the accounts.

And, famously, Sir Marcus Agius resigned as Barclays (LSE: BARC.L - news) chairman in 2012 after the bank admitted some of its employees had been trying to rig the Libor rate - only for the Bank of England to demand that he stay on and that Bob Diamond, the chief executive, step down instead.

Mr Fairburn, a car mechanic's son who left his comprehensive school at the age of 17 to become a quantity surveyor, is well-liked by shareholders.

Few of them wanted him to leave. There was no choice but for Mr Wrigley to step down.