Next Gen News

Letter to the supermarket encourages shareholders to stand up to excessive '\\' awards in the U.S.

Tesco could face an investor revolt next month as a number of shareholder lobby groups line up to vote against the level of boardroom pay at the supermarket group.

Leading US investor CtW Investment Group today wrote an open letter to Tesco shareholders urging them to take a stand on what it describes as "excessive" pay at next month's annual meeting. RiskMetrics, whose Research Recommendations and Electronic Voting (RREV) service provides voting advice to UK pension funds, and Manifest, which also advises pension funds, have both raised a red flag over executive pay.

The CtW letter, seen by the Guardian, says: "Tesco shareholders should take decisive action to address the remuneration committee's acute failure to link executive pay with performance. These failures are evidenced by the excessive compensation awarded to Tim Mason despite the US operation's dismal performance."

Tim Mason heads Tesco's American start-up Fresh & Easy and was recently promoted to deputy chief executive. He is the second highest paid director after the supermarket's outgoing boss Sir Terry Leahy: last year they were paid £4.3m and £5.2m respectively. Leahy also made £2.3m on share options and Mason £2.2m while the duo also received a combined £4m in long-term incentives.

Last week, Leahy announced he was planning to retire in March after 14 years in charge and the current head of the international business Philip Clarke was anointed chief executive designate. The grocer made profits of £3.4bn, up 10% on the previous year.

CtW works with pension funds linked to US unions including the United Food & Commercial Workers International Union (UFCW) which has campaigned against Tesco for not recognising unions in its US business. Tesco denies the accusations and insists its pay and conditions for workers are generous. In the letter, CtW alleges that the Tesco remuneration committee has "shifted the goalposts in order to provide Mr Mason with a pay package that no reasonable analysis of Fresh & Easy's performance could justify".

The annual meeting, which is being held in London's QE2 centre on 2 July, has in recent years become a cause célèbre for interest groups ranging from animal welfare campaigners such as celebrity chef Hugh Fearnley-Whittingstall to unions such as the UFCW and Unite, which last year requisitioned a resolution demanding better conditions for agency workers.

The RREV voting advisory service is concerned about the remuneration committee's decision to pay 65% of the annual bonus award relating to specific US objectives at a time when the Fresh & Easy chain continues to underperform on the US west coast. Last year Fresh & Easy lost £165m on sales of £354m.

RREV also highlighted the full vesting of a discretionary bonus related to return on capital employed relating to international targets. In its report it says: "In respect of this decision, the explanation in the annual report provides no insight into how this conclusion was reached." It adds: "Given the concerns identified with both the structure of the remuneration arrangements and the decisions taken by the remuneration committee … shareholders are advised to vote against."

At last year's AGM, when RREV recommended voting in favour of the remuneration report, some 7.3% failed to support the report on the day.

As in previous years, RREV also wants arrangements for severance payments to be changed. Currently, executive directors who are axed or asked to leave qualify for a bonus payment equal to an average of the previous two years' bonuses.

RREV also objects to the fact that, excluding the chairman, the Tesco board after this year's annual meeting will comprise only five independent non-executives but eight full-time executive directors. The combined code of corporate governance recommends a 50:50 split.

Manifest does not provide investors with advice to vote for or against a resolution but has raised a number of areas of concern. The group pinpoints the balance of the board, termination payoffs and the discretionary payments as potential flashpoints.

A Tesco spokesman said tonight: "We are disappointed by these reports, especially given the strong performance of Tesco in the last year against the backdrop of very difficult economic conditions. In contrast to RiskMetrics, the influential ABI has recently published a supportive 'Blue Top' report on Tesco for shareholders.

"Our approach to executive pay is based on rewarding good long-term performance and we have just recorded another record year of sales and profits and a 26th consecutive year of increased dividends.

"The performance bonuses for Tim Mason reflect the progress he has made in developing the Fresh & Easy business despite the severe economic conditions which has meant a slower than planned opening programme. The stores we have open remain very popular. Customer feedback has been fantastic, customer numbers are growing strongly, basket size is increasing and we are becoming a major retail player â€" already the 75th largest retailer in the US.

"We will continue to meet with shareholders to explain our approach ahead of next month's AGM."