This technical analysis supports the statements of value as computed by UKSA.
It is necessarily complex but includes simplified summaries of the key points of the Plan
The full text of Persimmon’s description of the scheme is here
Persimmon Financial Summary year 2013 (all per share):
- Current (21/3/14) share price; 1,367p
- Distributable reserves (per share): 491p
- Cash and ‘available for sale financial assets’: 138p
- Borrowings: nil
- Land bank (6 years): 537p
- Earnings: 83p
- Consensus forecast earnings: 107p
Persimmon Annual Report 2013
- The LTIP allows grants of up to 30.2 million options (10% of capital) to ‘about 140 executives’. All the options were granted immediately.
- A few options have been granted subsequently at higher prices to replace lapsed options (leavers).
- 9.5million options are now held by three current directors.
- The previous Chief Executive (Mike Farley) was granted 5million options but retired in April 2013. Under the formula for early leavers 4.5 million of these options should have lapsed but the Remuneration Committee allowed him to keep 966,000.
- The grants are subject to a performance condition.
The performance condition requires the staged payment of dividends over 10 years from January 2012 to December 2021, divided into 5 periods.
- The 5 periods each terminate in a 'pseudo-vesting date' (PVD) .
- Cumulative dividend targets apply at each PVD.
- The end target (PVD 5) is 620p per share.
For PVD 1 (Dec 2015):
- The PVD 1 dividend target (170p) has to be hit or the whole scheme folds.
- Persimmon have declared dividends of 145p to date and announced an intention to pay 95p in 2015 (total 240p t Dec 2015).
- This target is a certainty(see financials).
Each individual potentially earns a chunk of options at each PVD, accumulating to his/her grant total at PVD 5
- If a PVD 2-5 target is missed the scheme closes but the options already earned to that point vest
- So after each PVD each beneficiary has a chunk of options that cannot be taken away from him even though the 10-year targets may be missed.
- But the options haven't technically vested, so their value is still not reported under the new reporting regulations.
This of course makes nonsense of its description as a Long Term Incentive Plan. It's really 5 X 2-year plans connected in sequence.
If the scheme runs to term the options vest and are exercisable within 12 months.
The strike price of the options is 620p minus cumulative dividends paid. If 620p is hit early everything vests early and the scheme closes early. So it may be a 6-year plan (that's my guess - it's already come down from 10 to 9 - see Persimmon Annual Report 2013 ). Which is just as well as there will be a new wave of executives coming through by then, who will presumably need to be incentivised with another 9% of the company.
The strike price at an intermediate PVD equals 620 minus cumulative dividends. paid to date. So for 2015 we are heading towards 620-240 = 380. This is only relevant for the retired Chief Executive (Mike Farley, April 2013) and other leavers - for the rest the scheme goes on
- At a share price of 1367p the Farley options are worth 987p.
- At full term the other options are worth 1367p.
In sterling terms:
- Farley’s options are worth £10million
- 3 current directors - Killoran, Fairburn, Greenaway - have a total of of 9.5 million options worth £120million. (We knocked £10million off the simple sum because 2million of Fairburn's options were granted at a strike price £5 higher than the main grant)
- The total option grant of 30.2million shares is worth £400 million.
- The total option grant at PVD 1(Dec 2015) is worth £110million.
A full analysis of value would not just take the current share price but would:
- assess the value added by the company’s earnings over the next 8 years,
- deduct 620p for dividends paid out,
- discount these cash flows to present value at appropriate risk-adjusted rates, and
- modify the result by the probability of failing to meet the performance condition.
We haven't done any of this, because we have lives to live. Maybe it’s just sufficient to observe the extent to which the company’s earnings per share will exceed the target dividends, and to note the analysis in that report on the ‘challenge’ of the performance condition (using earnings projections now seen to be seriously under-estimated).