How come John Ions, Liontrust Asset Management (LIO) seasoned managing director, received £6.6m in his accounting year to March 2021? Over the past five years it has received almost £20m – the kind of amount you normally only see at the biggest companies in the FTSE 100. Liontrust, however, is hiding in the foothills of the FTSE 250 index.
The short answer is, of course, performance-related pay, and there’s no doubt that Liontrust has grown by leaps and bounds. Ions’ earnings in 2021 were driven by impressive flows into its group’s funds, both domestic and overseas, which were boosted by three selective acquisitions. Profits soared, as did the share price – a transitional £2.6m of its £6.6m was due to share price gains.
His bonus, however, seemed to have been decided by what seemed right. The bonus pool just for him and the CFO was equivalent to half the increase in the group’s adjusted pre-tax profit, even though this had already been taken into account in determining the bonuses. Think of it as a form of profit sharing. Previously, non-executives had limited Ions’ bonuses to five times his salary (of £348,000), but the group had never adopted a formal cap, and for 2021 they have done so eight times. Of that £2.8 million bonus, £870,000 was in cash (2.5 times his salary) and the rest was in shares, which he will receive in three years as long as he does not resign (or does not behave badly), and there are no bad surprises in historical reporting or risk management.
Under the new policy proposed in February, the directors made sure to keep Ions’ full compensation: he could still receive £7million, but only for “outstanding overall performance” if the stock price of the stock increases by 50% over the next three years. . Their main aim was to rebalance executive pay packages, so they suggested raising Ions’ salary to ‘market standard’ for FTSE 250 companies by £550,000. It doesn’t matter that Liontrust is one of the smaller companies in the index – fund managers expect high compensation for themselves.
To compensate for this higher salary, they have set a bonus cap of 4.5 times salary (£2.475million). The bonus would continue to participate in additional profits, but the performance dashboards would “include a greater focus on ESG-type metrics” and be made more stringent. It would yield about 50% more in cash and proportionately less in stock. Since the two executive directors already own approximately one million shares of Liontrust each, they can instead choose to defer payment in Liontrust funds – a perk of working for a fund management company.
A dramatic change has also been proposed for long-term equity awards, which take the form of zero-cost options. Performance will be assessed over three years and executives will not be able to sell the shares for two years. But instead of tying that annual share award to salary, for Ions it’s set at 0.25% of the number of shares outstanding, which equates to 153,130 shares for each of the next three years. In February that would have been £2.3million, but the first reward isn’t due until June 2022, and since then the share price has fallen from £15 to around £10.
So what exactly was it about these proposals that shareholders didn’t like? The salary cap and increased clarity were to be welcome – the previous lack of transparency had fed suspicious minds. The severing of the link between equity awards and salaries was also positive – salary increases will no longer increase this performance-related pay. No, the main sticking point was the scale. So even if the administrators had modified the earlier proposals after comments from institutional investors who own more than half of Liontrust’s shares (and include CFP SDL UK Buffettology Fund (GB00BF0LDZ31) which owns 8%, BlackRock 7% and Abrdn 6, 5%), 45% of the votes at the general meeting opposed the new policy. This is despite the overwhelming majority approving his £6.6million pay report at the annual meeting a few months earlier. This protest was not enough to stop the policy from passing, but it was a setback. “The compensation committee is fully aware of the down votes,” the directors conceded, but remained adamant that “the best interest of all our stakeholders” is best served by keeping the “exceptional management team” alive. on board.
Fund managers rightly scrutinize executive compensation at the companies they invest in, so it’s reassuring that they can get a dose of their own medicine. Their own compensation is determined by the growth of the assets they manage, but it’s cyclical – when the markets go down, private investors run for the exits. In today’s market, if Liontrust’s best team can repeat last year’s performance, it will definitely be “outstanding”. But whether or not some deserve as much as that hypothetical £7m is another matter.