Tesco board changes bonus rules after rival Ocado becomes too successful

The board of Tesco changed the way it calculated bonuses for supermarket executives because rival Ocado became too successful, according to company accounts.

Chief executive Dave Lewis would have missed out on the extra 979,113 free shares if the share price of the grocer’s online rival had not rocketed following expansion.

The details, published in Tesco’s latest accounts, also show Mr Lewis took home £6.42 million this year, making him one of the highest paid supermarket chiefs in the country.

It comes as the supermarket faced criticism for handing out a huge dividend at the same time as receiving a £585 million business rates holiday from the Government’s coronavirus support packages.

Dozens of businesses have held back dividend payments – including rivals Morrisons and Sainsbury’s – until after the crisis has abated.

Since joining Tesco in September 2014 and instigating a major turnaround, Mr Lewis has so far been paid £29 million, according to accounts.

His annual pay has only been topped by Sir Terry Leahy, who received £7.1 million in his final year at the grocer, just before several overseas operations started unravelling.

Tesco chairman John Allan, who is also president of the Confederation of British Industry (CBI), along with non-executives Steve Golsby, Byron Grote, Mikael Olsson, Deanna Oppenheimer and Alison Platt decided it would be wrong to compare Ocado’s shares to Tesco’s.

The remuneration committee they sit on explained: “As Ocado has seen a significant shift away from being a retail-focused business towards a technology-focused business during the performance period, the committee decided to remove Ocado from the benchmark from 16 May 2018. This was the date on which a clear pattern emerged of Ocado pursuing a technology strategy.”

With Ocado removed, Tesco shares outperformed its rivals, entitling Mr Lewis to the free shares – which he must keep for at least two years – but if Ocado had remained, the targets would have been missed.

The Tesco board made its decision just as Ocado signed its fifth deal – this time with US retailer Kroger.

Tesco made its own attempts at breaking into the US market with 199 Fresh ‘n’ Easy stores but quit in 2013 at a cost of £1.2 billion.

The details of Mr Lewis’s pay come as the supermarket published its annual report, which showed of the £6.42 million he received a £2.4 million cash bonus, a £2.4 million long term share bonus and a basic salary and benefits of £1.6 million.

He leaves the company at the end of September – having extended his contract to deal with the Covid-19 crisis – and will be replaced by Boots executive Ken Murphy.

Mr Lewis has defended his pay in the past, pointing out it is set by the board and that he likes to make significant contributions to charity.

As a “good leaver” he will also be entitled to some of his bonus for the current year, despite leaving before it ends. The full amount will depend on Tesco’s share price but could amount to more than £1.8 million.

The move comes two days after Sainsbury’s bosses were handed free shares worth £2 million in bonuses covering the same financial year the multi-billion pound Asda merger collapsed. They must wait two years before selling them.

A Tesco spokesperson said: “Our policy is to reward all colleagues responsibly, fairly and competitively against the relevant market pay benchmark for their role.

“The variable element of remuneration has paid out in line with the strong performance of the business last year, as we completed our five-year turnaround journey, delivered significant increases in profitability and cash generation, and built a better business for our customers, colleagues, suppliers and shareholders.”