Help to Buy scheme causes fury at Persimmon

UK housebuilding giant Persimmon is centre stage at the moment after two executives resigned amid concerns that a £500 million plus directors long-term incentive scheme benefited enormously from the UK government’s Help to Buy scheme. For once the UK government is not being criticised perhaps because all political parties were extremely positive on the need to introduce and then extend the Help to Buy scheme. The scheme effectively provides a Treasury backed loan of 20% to house buyers who only have to provide a 5% deposit from their own funds. Since the introduction in 2013, under the stewardship of George Osborne, the scheme has been extremely successful and helped to expand the UK new build housing market.

Persimmon increases new home supply

While there is no doubt that the long-term incentive scheme is extremely generous, it is worthwhile reminding ourselves of some statistics. Since 2012 Persimmon has increased the number of new homes it supplies to the market by 65%, invested £2.9 billion in new land and stands on the verge of again increasing dividend payments to shareholders. The recently proposed dividend will result in a staggering £9.25 per share return to shareholders since 2012. We are talking just under £3 billion in dividend payments since 2012 with the likelihood that more will follow in due course.

Incentivising management

Some reports suggest the scheme could be worth up to £800 million for the 150 staff included in the bonus scheme. The company’s chief executive will walk away with a bonus in excess of £100 million in shares with the first tranche set to be released by July 2018. Initially the scheme was set to run until 2021 but such has been the success of the company share price and dividend repayment to shareholders that it will effectively end early.

Those who will benefit from the scheme are now under intense pressure to forego a portion of their bonus payment but they have no legal obligation to do this and initial feedback suggests will not wilt under the growing pressure. The company has been extremely cash rich in recent years due to a buoyant housing market supported to a great extent by the Help to Buy scheme. The return of capital to shareholders has been well received and, let’s not forget, the company has also invested £2.9 billion into land for future use.

Has the Help to Buy scheme been too successful?

It seems perverse that we are discussing an extremely helpful house purchase scheme backed by the government, and all political parties, in a negative light. It is also worth remembering that Persimmon institutional shareholders were quite happy to vote through the long-term incentive plan for key personnel back in 2012. The reality is that collectively shareholders have benefited significantly more than those in the long-term incentive plan, institutional shareholders should have capped the scheme pay-out at the time and the UK government was only doing what everybody had requested by backing the Help to Buy scheme.

There will now be extreme pressure on not just housebuilders but all corporate entities right across the UK to rein in generous bonus schemes. At a time when public services are under pressure, wage inflation is minimal and household spending power is falling in real terms, directors of a UK company directly benefiting from UK government financial assistance for their customers does not sit well even with the strongest supporters of capitalism.

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