Financial and Business|

Tesco Reforms Executive Pay Schemes

Tesco LogoTesco, the supermarket giant, has cut the base salary target for its chief executive by 23%, as well as done away with its share-option program for members on the executive board. This comes as the retailer’s directors push to address shareholder complaints about executive pay.

In Tesco’s annual report this week, it said that chief executive Philip Clarke will get a £1.1 million base salary for the current fiscal year, which is down from the £1.43 million that former chief executive Terry Leahy was paid last year. Leahy retired from the company in March after serving as chief executive for 14 years.

This move comes amid a bigger shake-up in how Tesco plans to pay its top executives. The UK retailer is simplifying the targets used to figure incentives and rewarding all executive director in accordance with the same group targets. The change in base salary is a reflection of both the fact that Clarke is new to his position and a move to pay based more on performance. Despite the reform, this isn’t designed to cut the overall amount that top executives are paid. Remuneration committee chairman Stuart Chambers says that executives are being compensated at appropriate levels. The new arrangements are expected to need the same value as the current plan, but they have been simplified and rebalanced.

All of this comes following shareholders slamming the company’s method of rewarding executives at the annual general meeting last year. Almost one-third of them voted against the remuneration policy and even more avoided the issue.

A lot of the dissatisfaction was focused on Tim Mason, the US chief executive who was being paid a multi-million pound performance payout in the year that ended February 27, 2010 despite the US operation, Fresh & Easy, losing £165 million. He was given £2.6 million for performance-related compensation, which was in addition to his £1.02 million base salary and £648,000 in allowances and benefits. Total, his remuneration package amounted to £4.27 million.

In the most recent fiscal year, Mason’s total package was reduced to £3.1 million, because the loss of Fresh & Easy increased to £181 million. However, his base salary slightly rose to £1.025 million.

Tesco says that, starting fiscal year 2012, all remuneration packages for executive directors will be based on overall company targets. This means that Mason’s incentive plan won’t be based on the performance of Fresh & Easy. Long-term incentives will be based on 2 measures – the company’s return on capital expenditure and earnings per share. Short-term incentives are to be based on 7 measures – including carbon-dioxide reduction, sales at UK stores open in the previous year and space expansion. The chief executive will be made to hold shares worth 4 times his salary (rather than equivalent to it), while executive directors will have to hold shares worth 3 times their salary.

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