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The proposed share option package for Ryanair CEO Michael O'Leary, valued at up to €150 million, has sparked debate over the alignment of executive compensation with company performance and the risk of excessive rewards for market fluctuations.
The figure is the potential value of a share option package, and depends on O'Leary remaining at Ryanair until 2032 and hitting performance targets. Some might say no one is worth €150 million, although even O'Leary's detractors would admit Ryanair's growth would have been unthinkable without him.
Since 1994, he has transformed a loss-making minnow into Europe's largest airline by passenger numbers and created enormous wealth for shareholders. Still, it's fair to ask if O'Leary is being rewarded in the right way. The sheer size of the potential reward could encourage excessive risk-taking, cautions ISS. It also questions the €42 share-price target because O'Leary could benefit from a rising market or a broader recovery in airline shares, even without Ryanair outperforming its peers.
This is the classic "pay for luck" problem, one long recognised in the academic literature. If airline shares rise as oil prices fall, should a CEO get a huge reward? What if they plunge when oil spikes? Is that O'Leary's fault, or Donald Trump's?
Surely incentives should reward what managers can control, as opposed to what they can't? There is also the fact that O'Leary gets the award if Ryanair's profits exceed €4 billion in any one year through 2032. It does not have to sustain that performance, ISS noted. And the defence?
Well, the targets are demanding, O'Leary must stay until 2032, and Ryanair estimates that hitting the share-price target would create around €16 billion of additional shareholder value. His potential gain would represent less than 1 per cent of that. Indeed, Barclays went further in a recent note, saying the pay proposal strengthens the investment case for the stock.
"No other airline has incentives structures like these", said Barclays, praising the "very strong" alignment between management and shareholders. So is €150 million too much? That largely depends on whether you see an unusually powerful incentive as a flaw, as ISS does, or a virtue, as Barclays does
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