Tesco revamps executive pay to head off shareholder fight

SUPERMARKET giant Tesco has radically overhauled its executive pay structure in an attempt to head off another battle with shareholders at its forthcoming annual general meeting.

The third-biggest retailer in the world has abolished executive share options and simplified four long-term incentive plans into one single scheme after 47 per cent of investors last year voted against or abstained in a vote on rewards for directors.

Under the revised structure, revealed yesterday in the firm's annual report, new boss Phil Clarke will also receive a smaller basic salary than his predecessor Sir Terry Leahy, who stepped down in March.

Although the firm conceded that the structure is unlikely to lead to lower overall pay-outs for executives, chairman David Reid said it was simpler and targets would be better aligned with the interests of shareholders.

While Tesco's previous long-term incentive plans had five performance measures, the new single scheme has just two - return on capital employed and earnings per share.

Annual bonuses will be subject to seven measures as opposed to 20 while all executives will participate in the same plan, meaning that a separate scheme for Tim Mason, head of Tesco's US operation, Fresh & Easy, has been scrapped.

Mason's pay was a particular source of investor ire at last year's dramatic AGM as shareholders questioned why he was rewarded so handsomely when Fresh & Easy was racking up losses.

Meanwhile, executive share options will be replaced by performance share awards.

"We have designed a new structure which is simpler and more collegiate, with clear strategic financial targets, delivering broadly the same levels of remuneration as before but in a better way and more aligned with the interests of our shareholders," Reid said.

The retailer has also increased the number of shares directors must own in the firm to four times salary for the chief executive and three times for other top directors. Presently they only have to hold the equivalent of one year's salary in shares.

One institutional investor which is in negotiations with Tesco ahead of next month's AGM said the scheme was a step in the right direction, particularly as all board members will be subject to one plan.

"Separate rewards for different board members was against the principle of a unifying board where all members take responsibility for the business as a whole," a source said.

However there are still understood to be concerns in the City around some of the financial markers used to justify long-term performance awards.

According to one investor, Tesco has a history of using accounting rules to "airbrush" numbers on which executive awards are judged so that they are cast in the best possible light.Shareholder groups Pirc and the Association of British Insurers both said they would be reviewing Tesco's annual report over the next few weeks and it was too early to venture a comment

The report shows that Leahy left the company earlier this year with a total of 12 million in salary, awards and returns from cashing in share options.

Clarke will receive a basic salary of 1.1m, down from the 1.4m paid to Leahy last year.

Around 225,000 Tesco staff, including many workers on the shop floor, will share in a record 110m bonus pot after the company made record annual profits of 3.8 billion.

Usdaw, the union that represents shopworkers, and the TUC were both on an extended Bank Holiday break.