loss leader takes smaller haircut than headlines imply

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Big numbers shock, particularly when it comes to how much executives might possibly earn. Large sums that bosses might possibly have lost can be equally eye-popping. Astonishing headline figures often mask a bathetic reality, however.

Consider Bernard Looney. BP said its former chief executive would forfeit up to £32.4mn for failing to disclose past relationships with colleagues. Looney resigned abruptly in mid-September after admitting he had not been “fully transparent” in previous disclosures.

BP concluded this week that failure amounted to “serious misconduct”, which would affect his pay arrangements. Looney said he was proud of what he achieved as BP’s chief and was “disappointed” at the handling of the situation.

Of the £32.4mn maximum reported, the biggest contributor is the current value of unvested performance share awards. Looney was awarded 5.4mn shares under three plans. BP values these at about £25mn. However, it admitted it did not pro-rate for the date of Looney’s resignation.

imagine Looney worked for three-quarters of 2023. That would mean under the 2021-23 scheme, he only worked 2.75 years. Two other schemes, for 2022-24 and 2023-25, must be adjusted too. On a pro-rata basis, Lex’s back-of-an-envelope calculation suggests those performance shares would today be worth closer to £15.9mn.

Performance share schemes rarely pay out at 100 per cent, though. Over the past 10 years, BP’s performance share plans have paid out at an average of about 56 per cent. Applying that to the pro-rata amount delivers a number closer to £8.9mn than £25mn.

Similar logic also needs to be applied to other elements of Looney’s remuneration, including the £3.3mn maximum potential annual bonus for 2023.

After adjustments, the remaining sum foregone by Looney would be by no means small. But when it comes to pay calculations, words such as “maximum” can do a lot of heavy lifting.