About 15 months ago John Roberts, the founder, 23%-owner and chief executive of the online electricals retailer AO World, did a fine thing. He created an all-staff incentive scheme that is very different from other companies’ executive-only affairs. It was, he said in his folksy way, one he’d be “proud to tell my mum about”.
Senior executives at AO would still shoot for multimillion-pound rewards (capped at £20m) but lower-paid workers would chase meaningful sums rather than “a round of drinks”. There was talk of AO’s warehouse workers, on £18,000-£20,000 a year, being awarded £30,000 bonuses if maximum targets were reached.
This admirable venture, however, always looked vulnerable to an overdose of optimism. The share price targets just seemed a little too dreamy. Back in August 2020, AO hadn’t seen its float price of 285p for half a decade, yet the five- to seven-year scheme imagined a transformation. No bonuses would be generated until 523p was achieved and sustained, and the serious money would start at 941p.
For a brief period, lockdown seemed to have supplied the necessary online fuel by changing shopping habits among buyers of fridges, freezer, laptops and TVs. “I believe we’ve seen 10 years of change in 10 months,” declared Roberts in January 2021 as AO’s sales in the UK, and in the trickier market of Germany, boomed. The City agreed: the share price, which had been 100p pre-pandemic, hit 400p.
And now? Sadly, after the second profits warning in two months, the shares, down 14% on Tuesday, are back more or less where they started: 107p. After enjoying the whoosh of lockdown demand, AO is suffering the comedown of driver shortages and supply chain logjams. Worse, the company seems to have set itself up for growth that is not materialising. Top-line earnings are expected to be only £10m-£20m this year, quite a fall from last year’s £64m that was prematurely hailed as “a step-change”.
Roberts, ever bullish, says he remains “hugely optimistic about AO’s long-term prospects”. Viewed from the warehouse, however, the “value creation plan” may have lost some of its motivational force at the current share price. One hopes that’s not the case because Roberts was right about the basic unfairness of most share-based schemes. But he may have over-cooked his targets.
‘Central banks need to Pep up the market’
Mervyn King, during his time as governor of the Bank of England, introduced us to the Maradona theory of monetary policy. Just as the Argentinian genius skipped through England’s defence for his second goal in 1986 in a straight line (almost), so a central bank can achieve its desired outcome by keeping the markets guessing about which way it may swerve on interest rates. The market adjusts for an anticipated action that doesn’t arrive.
Now comes King’s Pep Guardiola theory. “You do not give a fixed plan to the players because it will be negated by an intelligent opposition and unexpected changes in circumstances,” he said in a speech on Tuesday evening, referencing Manchester City’s lauded manager.
The point this time is that central bankers have become unhelpfully hooked on forward guidance, and rely too heavily on models that show inflation always coming back to its target whatever the level of interest rates. Forward guidance, King argued, failed the Guardiola test. Stuff happens.
Loading up on analogies, he compared today’s central bankers to King Canute ordering the tide not to come in. Canute, of course, was deliberately demonstrating his lack of powers. In the same way, King suggested, central bankers would do well to say they don’t know where interest rates will be in future.
It is fair point. Forward guidance is vulnerable to being spectacularly wrong at times, which is a serious risk currently. Less forward guidance – and more focus on explaining movements in the economy – might serve us all well.
It would also spare us the increasingly tedious game of trying to decode every syllable of the current governor’s remarks on the likely path of inflation. If nobody’s prepared to give a timeline, the word “transitory” has lost its usefulness.
PM needed more CBI spice, not just Peppa
A week before his excruciating Peppa Pig World offering to the CBI, Boris Johnson made a speech in the City that was quietly praised in business circles. The chairman of one large FTSE 100 company said the address to the Lord Mayor’s Banquet was “the first speech I have heard from the prime minister that I could describe as statesmanlike”.
It attempted to define the role of “Global Britain” and was injected with a business-friendly vision for how the UK could pursue “technological superpower” status; “public billions” would leverage “private trillions”. The CBI audience would have lapped up more of the same. The goal was wide open.