Fresh & Easy Neighborhood Market CEO Tim Mason Leads All Directors in Tesco Stock Share Incentive Plan Payouts

Tesco director and Fresh & Easy Neighborhood Market CEO Tim Mason at the opening of the grocery chain's 150th store, on April 7, 2010. The store is at Olive and Verdugo in Burbank, California. [Photo credit: Fresh & Easy Neighborhood Market.]

News/Analysis/Commentary

Yesterday (July 20, 2010), eight Tesco directors - CEO Terry Leahy, current director of international operations and IT and incoming (March 11, 2010) CEO Philip Clarke, Fresh & Easy Neighborhood Market USA CEO Tim Mason, Richard Brasher, Andrew Higginson, Laurie McIlwee, Lucy Neville-Rolfe and David Potts - received ordinary shares of 5p each in Tesco plc stock, according to a required regulatory announcement from Tesco today. In March 2011, Tim Mason will have the title of Co-CEO (of Tesco plc) added to his director and Fresh & Easy Neighborhood Market CEO titles.

The stock shares were released to the eight directors, who also comprise Tesco's senior executive ranks, yesterday, at the end of the required three-year holding period. The shares come from: (1) the Tesco Long Term Incentive Plan, (2) the Tesco Executive Incentive Plan and (3) the Tesco Performance Share Plan.

Tesco's share price on Tuesday, July 20, when the directors received the stock, was 394.025p per share ($596.790 at today's exchange rate), according to Tesco plc. The company says it retained a proportion of the gross number of shares to cover the income tax and national insurance liability of the directors.

The top beneficiary of the stock share payout wasn't Tesco plc CEO Terry Leahy, who is retiring in March 2011. And it wasn't Philip Clarke, who will take over as CEO when Leahy retires early next year. Rather, it was Tesco director and Fresh & Easy Neighborhood Market CEO Tim Mason, who bagged the highest number of shares from the retailer's plans, even more than CEO Leahy.

Below is a list of the eight directors, ranked by the number of shares they received yesterday.

Director/number of shares received:

1. Tim Mason
388,524 shares

2. Terry Leahy
372,099 shares

3. Richard Brasher
198,024 shares

4. Philip Clarke
125,311 shares

5. David Potts
125,311

6. Andrew Higginson
125,311

7. Laurie McIlwee
44,236 shares

8. Lucy Neville-Rolfe
1,876 shares

At the close of the market today (July 21, 2010), Tesco plc shares were trading at 397.75 pounds per share ($602.432 at today's exchange rate). The stock shares from the plans were released to the directors yesterday at a price of 394.025p per share ($596.790).

Since the shares are being released to the Tesco directors after a three year holding period, in the case of Tim Mason, the time period tracks closely to when he came to America to start up Fresh & Easy, which was in late 2006-early 2007.

Mason's compensation has been a hot topic of late in light of the poor performance of Tesco's El Segundo, California-based chain of 159 Fresh & Easy Neighborhood Market fresh food and grocery stores, which are located in California (Southern and the Central Valley), Metropolitan Las Vegas, Nevada and Metro Phoenix, Arizona.

Read our stories linked below, for the details:

July 5, 2010: Verbal Fireworks at Tesco's 2010 Sharholders' Meeting in London

July 2, 2010: Tesco's Director Remuneration Report Approved at Today's AGM; But 47% of Shareholders Voice Opposition to Director Pay Packages

July 1, 2010: A Preview of Tomorrow's (July 2, 2010) Tesco Annual General Meeting

June 23, 2010: Tesco Fresh & Easy Neighborhood Market CEO Tim Mason Gets Big Stock Award Featuring a Singular Twist

June 24, 2010: Warren Buffett Strikes Again: Buys 2 Million More Shares of Tesco Stock For 3.2% Ownership Stake

June 4, 2010: Every Little (Bit) Helps: Tesco Fresh & Easy Neighborhood Market CEO Mason Paid $6.188 Million For 2009

Tesco reported a loss of $253 million, on sales of $544 million, for its Fresh & Easy Neighborhood Market USA fresh foods and grocery chain for the 2009/10 fiscal year, which ended in February of this year. [See - April 20, 2010: Strong Group Revenue & Profit For Tesco... But $253 Million Loss at Fresh & Easy]

In addition, Tesco reported a loss of $208 million for Fresh & Easy in its 2008/09 fiscal year. Fiscal year 2008/09 revenue for Fresh & Easy was $305 million.

Tesco has also projected a loss in the $200 -to- $253 million range, about the same as fiscal year 2009/10, for this fiscal year (2010/11), which ends in early 2011.

The first Fresh & Easy stores opened in November 2007.

Tesco and its Fresh & Easy Neighborhood Market chain under Tim Mason's leadership has also missed its goal of having 200 stores opened by the end of 2009 - there were about 120 units - and had set a goal of having about 300 stores opened, including in Northern California, by the end of 2010. It will miss the benchmark considerably. Based on current projections, there will be just under 200 Fresh & Easy markets open and operating at the end of this year. Tesco has yet to open any stores in Northern California.

If Tim Mason were to redeem the 388,524 shares of Tesco stock he received yesterday at today's share price he could do all sorts of fun things with the cash, like invest in a bicycle racing team in the UK, perhaps, or in surf shop in Santa Monica, California, maybe. Or he could give each of the employees of Fresh & Easy Neighborhood Market a nice little gift - or at least a reusable grocery bag full of food and groceries, which would have the secondary benefit of being a nice one shot sales boost for Fresh & Easy.

We don't begrudge Mr. Mason his stock shares or huge 2009 compensation package. And, he is a director of Tesco, which has been performing very well, with the exception of Fresh & Easy, in addition to running Fresh & Easy. But his $6.1 million compensation for last year and stock share payout looks (and frankly is) odd in relation to the performance of Fresh & Easy Neighborhood Market, which has been pretty much 100% of his focus since 2006. [See - June 4, 2010: Every Little (Bit) Helps: Tesco Fresh & Easy Neighborhood Market CEO Mason Paid $6.188 Million For 2009]

It's not up to us though to do anything about it, even if we wanted to. That's for Tesco's board, seven members of which received stock shares along with Tim Mason yesterday, and its investors to deal with. We report and analyze - they decide.

However, with a $200 million-plus loss predicted by Tesco for Fresh & Easy at the end of the current fiscal year - and based on our analysis there being nothing we can currently see that will change that for the 2011/12 fiscal year - you've got to wonder. And a reasonable man or woman - investor or non-investor - should ask such performance-related questions.

Tesco Fresh & Easy Neighborhood Market CEO Tim Mason Gets Big Stock Award Featuring a Singular Twist

News & Analysis

Tesco plc director and Fresh & Easy Neighborhood Market USA CEO Tim Mason (pictured above) has been granted rights to 292,085 ordinary shares of United Kingdom-based Tesco plc stock under Tesco's executive incentive plan, for which no payment by the reciepient is required. It's essentially a stock grant.

The shares were awarded to Fresh & Easy CEO Mason yesterday as part of Tesco's 2009/10 fiscal year annual defered bonus for the company's top executives, who are also members of its board of directors.

The number of shares awarded to Mr. Mason was calculated using an average Tesco plc market price of 388.05 pence, according to Tesco plc's investor relations department.

In addition to Tim Mason's stock share grant of 292, 085 shares, Tesco plc CEO Terry Leahy received a bonus award of 459,644 shares.

The following other Tesco executives-directors received the stock awards yesterday:

>Commercial and Marketing Director Richard W Brasher, 196,696 shares
>International and IT Director, Incoming CEO, Philip A Clarke, 196,696 shares
>Chief of Retailing Services and Group Strategy Director Andrew T Higginson, 196,696 shares
>Retail and Logistics Director David T Potts, 196,696 shares
>Group Finance Director Laurie McIlwee, 147,522 shares
>Corporate and Legal Affairs Director Lucy Neville-Rolfe, 147,522 shares

In an interesting development, all of the directors except for Fresh & Easy Neighborhood Market CEO Tim Mason, received their share awards in the form of nil cost options (share options that can be exercised without payment of a subscription price; essentially a regular stock option). In contrast, Mason's 292,085 shares is in the form of an unfunded promise to deliver shares, which means, among other things, he can't exercise the options at any time, like the others can if they choose to.

For Tim Mason this basically means that unlike the other directors, who's shares will be increased to reflect the dividends that would have accrued on vested shares had they been reinvested in shares in the period between the stock grant and its exercise (the nil cost option), and can be exercised if desired, his award is what's called grant and vesting (an unfunded promise to deliver shares), which means the award will vest but Mason won't be able to exercise any of the 292,085 shares before May 22, 2013.

We suspect, among other considerations, the special handling of Tesco plc director and Fresh & Easy Neighborhood Market CEO Tim Mason's stock award might have something to do, but not exclusively by any means, with Tesco's being under attack by the CtW Investment Group, which invests money from labor union pension funds in various corporations, including Tesco plc. The group is arguing that Mason received excessive compensation for fiscal year 2009/10. [Read our June 4, 2010 story on his compensation package here: June 4, 2010 - Every Little (Bit) Helps: Tesco Fresh & Easy Neighborhood Market CEO Mason Paid $6.188 Million For 2009]

On June 17, 2010, CtW investment Group and the Change to Win coalition of labor unions, many of which have pension fund monies invested in Tesco, sent this letter to Tesco plc shareholders regarding Tim Mason's pay package. In the letter they urge Tesco shareholders to vote no on proxy Item #2, the Directors' Remuneration Report, at Tesco’s upcoming July 2 annual shareholder meeting in London, UK.

The group also distributed this press release about the letter and campaign to media outlets far and wide on June 17. The release has generated considerable press on the issue, focusing on Mason's 2009/10 pay package and the group's attempt to get Tesco plc shareholders to vote against it at the July 2, 2010 shareholders meeting.

Perhaps Tesco believes that granting Tim Mason's stock award on the unfunded promise basis, which means he can't exercise any of the shares until May 22, 2013, will help blunt some of this criticism, leading to a majority vote of Tesco shareholders in favor of the Directors' Remuneration Report at the July 2 shareholder meeting. Or perhaps, among other considerations, it's just good politics, considering Fresh & Easy's $253 million loss for fiscal year 2009/10? If shareholders were to vote the report down it would mean Tesco couldn't go forward with the pay packages, including the stock awards listed above, for the corporation's directors.

The objective reality is the probability of Ctw Investment Group and the labor union group getting a majority investor vote against the Directors Remuneration report is highly unlikely for a number of reasons, chief among those reasons being that the majority of Tesco investors with voting rights are the big, institutional investors. For example, U.S. billionaire Warren Buffett, who owns 3% (about $1.3 -to- $1.4 billion in value) of Tesco plc through his Berkshire Hathaway holding company and investment firm, won't likely vote against the report.

These big investors will likely vote for the package for two key reasons. First, Tesco plc had record profits in its 2009/10 fiscal year. Therefore the investors aren't going to let Tim Mason's pay package get in the way of affirming the report. Second, these institutional investors don't want to veto the report because doing so would lead to a drop in Tesco's stock share price, meaning their investments would drop in value.

Adding to this, voting against the report would likely lead to uncertainty in the market vis-a-vis Tesco plc, potentially leading to further reductions in the retailer's share price. This is the last thing these big, institutional investors want to happen.

The investor-types at CtW Investment Group are aware of this probability, as are the heads of the labor unions. Or they should be. Ctw has authored resolutions at previous Tesco annual meetings that were rejected by these same big, institutional investors, who've got the votes.

However, the unions see a secondary benefit to the "vote against the report" campaign, which is to increase the pressure on Tesco via investors and the public (via the media) in its efforts to organize and unionize Fresh & Easy Neighborhood Market's store-level employees, which the United Food & Commercial Workers (UFCW) union has been trying to do since the first Tesco-owned Fresh & Easy grocery stores opened in late 2007.

Tesco's annual shareholder meeting is just 10 days away. Therefore we'll see the results of this issue come to a head very soon, at least in terms of the shareholder vote - but certainly not in terms of the ongoing campaign to unionize Fresh & Easy workers.

Fresh & Easy Buzz Linkage: Related Stories:

June 4, 2010 - Every Little (Bit) Helps: Tesco Fresh & Easy Neighborhood Market CEO Mason Paid $6.188 Million For 2009

June 21, 2010: The Missing Link in Tesco's Purchase of Fresh & Easy Neighborhood Market Meat Supplier '2 Sisters Food Group'

June 20, 2010: NLRB Judge Rules Against Key Fresh & Easy Neighborhood Market Supplier '2 Sisters Food Group' in Labor Relations Violations Case

June 20, 2010: NLRB Judge Rules Against Fresh & Easy Neighborhood Market in Spring Valley CA Store Labor Law Violation Case

March 4, 2010 - Aministrative Law Judge Finds Tesco's Fresh & Easy Violated Labor Relations Act in Ex-Store Employee, UFCW Union Complaint

August 5, 2008: UNI Global Union Launches Tesco-Specific Alliance; Calls For Tesco Executives to Meet With UFCW Union Officials Over Fresh & Easy Neighborhood Market

June 26, 2008: Tesco 2008 AGM: Barack Obama Sends Second Letter to Tesco CEO Requesting the Company Meet With U.S. UFCW Union Leaders About Fresh & Easy

June 26, 2008: Tesco 2008 AGM: Charges of Tesco's Exploiting Workers at Indian Factory Heat Up On the Eve of Corporate Annual General Meeting

June 22, 2008: Vocal Cast of Critics and Advocacy Groups to Attend Tesco's Annual General Meeting On Friday, June 27

June 4, 2008: News and Analysis: UFCW Union Takes its Tesco Union Organizing Campaign Across the Pond to the United Kingdom Beginning Today

February 11, 2008: Supermarket Union President Asks Britain's Prince Andrew to Arrange A 'Sit-Down' With Tesco Fresh & Easy Neighborhood Market Senior Executives

Some additional links here.

[Photo credit: Fresh & Easy Neighborhood Market]