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.

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

Tesco's Fresh & Easy Neighborhood Market USA hasn't come close to break-even yet. (The first stores opened in November 2007.) The nearly three-year-old fresh food and grocery chain posted a loss of $253 million for its 2009/10 fiscal year ended February 27, 2010, which is $45 million more than the $208 million loss Tesco reported for Fresh & Easy for its 2008/09 fiscal year. But Fresh & Easy CEO and Tesco plc director Tim Mason (at left) is doing just fine in terms of compensation, thank you: He pocketed $6.188 million (£4.27 million) last year for his efforts, about $3.477 million (£2.4 million) of it as a bonus, according to Tesco.

In fact, only one other member of United Kingdom-based Tesco plc's senior management team, its leader CEO Sir Terry Leahy, carted home more money in salary, bonus and stock last year than did Mr. Mason. CEO Leahy, who's been with Tesco for 31 years and CEO for 13 of those years, took home a combined total of £5.22 million ($7.564 million) for 2009. His salary portion of the total was £1.4 million ($2.028 million), with the rest being in various forms of performance-related pay. Tim Mason was Tesco's second-highest wage earner after CEO Leahy in 2008 as well.

Interestingly, CEO Leahy's 2009 total compensation the previous year was at £5.1 million ($7.390 million) at bit less than he took home this year because he took a pay cut in 2008/09 of £370,000 ($536,167) due to Fresh & Easy's failure to hit certain performance targets. Apparently the fact Fresh & Easy lost $45 million more in fiscal 2009/10 than it did in 2008/09 didn't trigger a pay cut for Leahy this time around. And it certainly didn't for Fresh & Easy CEO Mason, who earned nearly as much total pay as Leahy did for fiscal year 2009/10.

Tim Mason's and Terry Leahy's bonuses come out of a total pool of £24 million ($34,778) allocated by Tesco for its senior executive team, the result of achieving its highest profits in the company's 91-year history for the 2009/10 fiscal year.

Tesco also said it's created a bonus pot of £105 million ($151.777 million), which will be distributed to 216,000 of its employees in the United Kingdom, ranging from store clerks and office staffers to warehouse workers, as part of its annual "Shares in Success" worker bonus program. None of those funds go to employees of Tesco's U.S. Fresh & Easy chain. Tesco hasn't disclosed, and we haven't verified one way or the other, if Fresh & Easy workers are receiving a similar bonus.

Tim Mason has worked for Tesco since 1982. Mason, who is the the son-in-law of Lord MacLaurin, the former chief executive of Tesco who groomed Sir Terry Leahy for his current CEO position, started out with the retailer as a dry grocery category buyer, moving into the marketing department after two or three years. There he learned the Tesco marketing ropes working alongside then marketing director Leahy. In 1995 he became marketing director of Tesco in the United Kingdom. Before coming to California to launch Fresh & Easy in 2006, Tim Mason also was chairman of Tesco's online operations, Tesco.com, which as marketing director he played a major part in creating.

Succeed or fail, from a compensation standpoint Fresh & Easy Neighborhood Market is a win-win for CEO Tim Mason. His total compensation, including bonus, is based on Tesco's overall performance. In addition, since he is a corporate director of Tesco plc, along with being the CEO of its U.S. operation, he gets stock options based not on Fresh & Easy's performance but on that of Tesco as a whole.

Of course if Fresh & Easy Neighborhood Market does succeed in terms of hitting certain performance standards, both CEO Mason and Tesco plc CEO Leahy stand to win big. For example, according to Tesco, Leahy and Mason are entitled to nearly 50 per cent of their respective salaries in deferred company stock if Fresh & Easy hits certain performance targets over a given period of time. From a purely compensation standpoint that's the definition of success for Mason and Sir Terry at Fresh & Easy. According to Tesco, CEO Leahy was awarded 65 per cent of the potential maximum number of those shares as part of his annual bonus this year. It didn't say if Mason was awarded any of his shares as part of his bonus for the 2009/10 fiscal year.

That's the big win. But taking home $6,188 million as the head of a grocery chain that's lost nearly half a billion dollars in the last two years isn't bad either. In fact, it's nice work if you can get it, albeit at times it's probably a bit challenging and frustrating. Perhaps there's some sort of start up-oriented incentive pay built into that $6.188 million? And, in these times, like Tesco's famous slogan says: "Every Little (Bit) Helps."