Transaction-based awards and CEO pay

25 March 2019

Editor

EU regulation

AGM Update:

Following the 29 March AGM, Micro Focus disclosed that the Remuneration Report was defeated with a 50.4% vote against - on a non-binding basis.  

Shareholders have become accustomed to the concept of pay for performance, but pay for transactions rarely attract the same level of scrutiny. Micro Focus International plc (LON: MCRO) offers an interesting case study on the impact of transactions.

Micro Focus International plc’s CEO Christopher Hsu resigned in March 2018 after only around six months service. Hsu was appointed as CEO in September 2017 following the completion of the reverse takeover of Hewlett Packard Enterprise (HPE) software assets. However, after Micro Focus issued a profit warning following a fall in sales and integration concerns, Hsu stepped down from the board.

This year's annual report notes that Hsu received a payment of $5.9m to cover the grossed-up costs of the excise tax incurred as a result of US “inversion” tax treatment of the merger. While the payment of tax gross-ups is common in the US, international investors may be both surprised and disappointed by the lack of transparency regarding the payment.

Stephen Murdoch has since been appointed as the new CEO. Murdoch served as CEO prior to the merger but stood aside to become Chief Operating Officer after the transaction completed. Murdoch’s salary has been set at £850,000, 66% higher than the £512,500 salary he received as CEO prior to the deal.

Micro Focus made additional share grants to executives in 2017 after the HPE software transaction. The awards were due to vest on 6 September 2019, subject to meeting a performance condition based on shareholder returns. However, the Remuneration Committee used its discretion to replace the awards with new awards and extend the target deadline to by another year to September 2020. Micro Focus’s share price significantly fell after the profit warning meaning the awards were unlikely to vest.

During the year additional share grants awarded in 2014 in connection to the acquisition of Attachmate Group vested in full. The awards were also based solely on shareholder returns over a three-year period and required a growth of 100% to vest in full. The Committee report the value of the awards received by executives amounted to £55.5m in aggregate with executive chair Kevin Loosemore receiving the largest award of over £25m.

The Committee states it is aware of the distorting impact the additional grants can have and are not planning on making future awards at this time and will undertake a review of its reward strategy in 2019 ahead of a new policy being put to the vote at the 2020 AGM. Nevertheless, shareholders may well be concerned by awards of additional share grants and probably consider them to be a form of transaction-based award which results in excessive pay.

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