Et tu, Gerry Harvey?
I've long admired Gerry Harvey's style. He's built a remarkable retail empire and is renowned as a straight-shooter.
So I was caught off guard by the announcement that Harvey Norman is planning to issue a swag of options to its senior executives (including Gerry Harvey and his CEO wife, Katie Page), in an effective re-pricing of formerly-issued options that haven't paid off.
Shareholders will vote on the options issue at an Extraordinary General Meeting on the 30th of April.
Executive options are not our preferred form of remuneration at The Intelligent Investor. They have the potential to skew incentives by offering unlimited upside and no downside.
If you're the recipient of an options package, you have an incentive to get the share price as high as possible, which is fine as far as it goes. The problem is if your strategies or implementation fail.
Unlike ordinary shareholders, your downside is the same whether your actions lead to the share price falling by 10 per cent or by 80 per cent. You can simply let the options lapse. An option holder doesn't have to put any money down, so they don't have any cash at risk.
It's a similar kind of set-up to the bonuses at investment banks which led to rampant risk-taking during the credit boom. The recipients get all of the upside and none of the downside.
In defence of Harvey Norman, I doubt the issue of a few million options to Gerry Harvey will tempt him to put his empire at risk (he also owns some 311 million ordinary shares). So Harvey Norman shareholders shouldn't hit the panic button.
Managerialism reigns
This kind of thing is par for the course in corporate Australia. One colleague has described our current system as ''not capitalism, but managerialism''.
By this, he meant that the rewards of a company's success are increasingly flowing away from shareholders and towards top managers through huge remuneration packages and option grants just like this one.
So it's not that Harvey Norman is particularly bad, it's just that I had hoped for better from Gerry Harvey. I recall seeing him interviewed several years ago. At the time, his annual remuneration was around $250,000 per year.
The interviewer contrasted Harvey's remuneration package with the multi-million dollar versions handed out by companies of a similar size to Harvey Norman. Gerry rejected the interviewer's relativism.
''250,000 is about $1,000 a day,'' Gerry admonished, ''you have to be pretty good to be worth more than $1,000 a day, I reckon.'' (I'm paraphrasing here). But times are a-changing and Gerry Harvey's remuneration package is starting to look much more typical.
As someone who began studying the BRW Rich List as a teenager, I have developed surprisingly few Australian corporate heroes. If you'd have asked me ten - or even five - years ago, Gerry Harvey would probably have been on my list. Today, I'm not so sure.
Perhaps my former admiration was a bit naive. Although this is the largest such options deal Harvey has put in front of shareholders, it certainly isn't the first.
If you'd like to read more about the particulars of Harvey Norman's proposed options issue (and why we're recommending our members vote against it) I have unlocked yesterday's analysis by James Greenhalgh for you (usually members only): Vote against Harvey Norman options.
That analysis explains why we question several aspects of this options issue. It's particularly intriguing why Harvey Norman feels the need for a special shareholders' meeting to approve the issue (why not just wait until the next annual meeting?). The terms also strike us as extremely favourable to the executives.
Instead of complaining after the fact, it's crucial that shareholders begin taking a stand against remuneration that they deem inappropriate. If you're a Harvey Norman shareholder and believe that this options issue falls into the ''inappropriate'' basket, then it's time to take up the cudgel and vote against it at the coming meeting.
This article contains general investment advice only (under AFSL 282288).
Greg Hoffman is research director of The Intelligent Investor which provides independent advice to sharemarket investors. BusinessDay readers can enjoy a free trial offer at The Intelligent Investor website.
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