Considering how the media scrutinises privatised utilities, it was inevitable that early in 2023 the cavalier way that some of Centrica’s (CNA) contractors had been installing prepayment meters under warrant would be pounced upon. The group’s chief executive, Chris O’Shea, resolved this quickly by sacking the contractors and bringing the work in-house, but even so, he had 10 percentage points of his year’s bonus docked because of it.
Despite this, his pay seemed to balloon in 2023. More controversy followed. Centrica’s latest annual report shows that O’Shea received almost double that of the year before – his £8,231,000 was 83 per cent higher, and not far off 10 times his 2021 pay of £875,000. That year, his share awards had failed to pass their performance conditions and he’d waived his annual bonus because of hardships then being suffered by customers. Challenged about the £4,490,000 he’d received in 2022, he made no effort to defend it. “You can’t justify a salary that size,” he said. “It’s a huge amount of money. I am incredibly fortunate.” He stressed that he played no part in determining his own pay. “That’s set by the remuneration committee.”
Centrica is always associated with British Gas, which supplies gas and electricity to homes and small businesses, but it does far more than that. It describes itself as an “integrated energy company operating primarily in the UK and Ireland”. Scott Wheway has been chairing the group since 2020, the same year that O’Shea became chief executive. He credits O’Shea with reshaping and simplifying the businesses, through which Wheway says the group has been turned around. He says that its strong finances and trading activities have made Centrica a unique “lynchpin of stability in a market that for the last few years has been in turmoil”.
That turnaround accounts for the increased amount received by O’Shea in 2023. As ever, most of his reported “single figure of total remuneration” resulted from a historic share award. Between June 2021, when the award was made, and its notional valuation of £5.9mn at the end of 2023, the share price had nearly tripled to 150p. The investment gain on these shares was £3.9mn – almost half of his apparent 2023 pay. Since that valuation, the share price has fallen by about a tenth and the shares won’t vest until June 2024, so these amounts are likely to be restated in next year’s annual report. The shares will then carry the same risks as for shareholders – the group won’t let him sell them until June 2026.
What’s critical for investors is how such share awards are funded, and it’s a shame that companies don’t make this more explicit. It might defuse some of the criticism. If new shares have to be issued to satisfy the awards, shareholders pay the full cost through share dilution. If instead the shares are bought upfront when the shares are awarded, any gain will be entirely funded by the market – and so (in cash terms) comes for free. Centrica provides for the shares it awards through share buybacks and by holding sufficient in an employee benefit trust. In 2023, for example, Centrica bought back 8.7 per cent of its own shares. Of these 512mn, 66mn were used for the group’s employee share schemes.
The rising share price geared up the published 'pay'. First, it drove one of the performance conditions – 85 per cent of the awarded shares were released. Secondly, it boosted the value of these shares. The remuneration committee said this was because of the improved business performance and chose not to adjust the outcome, despite the spike in oil and gas prices. The members don’t see this as a windfall gain – the management of forward gas prices to smooth their impact is part of the group’s normal activities.
The focus now is on net zero, which O’Shea identifies as “the biggest single opportunity we have at Centrica” based on his “belief that climate change is the biggest single threat facing civilisation today”. The group’s aim, he goes on, is “to drive forward, and benefit from, the energy transition” through “a relentless focus on performance and continuous improvement, and disciplined but bold capital allocation” that will transform how Centrica generates, stores and uses energy.
Whether or not that goes to plan, O’Shea’s future payouts are likely to be less generous. Since 2022, Centrica has been awarding half as many shares as before – they’re restricted shares, unencumbered by the previous raft of performance conditions. So, unless the committee makes discretionary adjustments, success in the drive towards net zero won’t reward executives as much.
The downside is that the opposite applies. If their performance falls short of targets, they’ll still get the shares, and so receive more than they would have done under the previous policy. Shareholders who supported the restricted share policy presumably accepted this as a pragmatic, if undesirable, outcome.
