COLUMN-The Next incentive plan for Shell: Neil Collins

Wed May 20, 2009 10:11am EDT

— Neil Collins is a Reuters columnist. The views expressed are his own —

By Neil Collins

LONDON, May 20 (Reuters) – The unholy alliance between remuneration consultants, non-executive directors and company boards was dealt a bad blow this week, when the shareholders of Royal Dutch Shell (RDSa.L) voted against the company’s executive pay rewards.

The blow may not be fatal, but it’s certainly serious. The rise of the remuneration consultant is one of the more egregious developments of the last decade. They are brought in to advise on suitable incentives for the people at the top, for whom a mere salary is insufficient to get them out of bed in the morning.

They tell the non-execs on the remcom (some of whom are executives elsewhere) that to get the best people, they must not only pay up, but offer a series of rewards so complex that the shareholders will never be able to work out whether the happy recipients have earned them or not.

Unfortunately for Shell, the shareholders did notice that ranking fourth out of five big oil companies was not the same as ranking third.

The remcom, under Peter Job, decided to pay the money to Jeroen van der Veer anyway. Even the institutional investor worm turned at this legerdemain. The episode shows what a charade this process has become, and will hasten the day when bonuses can only be paid after specific approval by shareholders.

It need not have been this way. Five years ago Simon Wolfson, the feisty chief executive of clothing group Next (NXT.L), devised an elegant scheme to try to make his fellow-directors rich (he was already) without impoverishing the shareholders.

Next paid the execs six-figure bonuses, but insisted they find the same (net of tax) sum themselves, and used the whole lot to make a bet with Goldman Sachs. Next shares were 15 pounds each then, and if they were not above 20 pounds in five years’ time, the bet would be lost. If the price passed 25 pounds, the participants would each make seven-figure sums, tax-free.

This offered the prospect of private equity-style returns for exceptional performance, with the risk of losing the six-figure sums they had put in.

Alas, the scheme has foundered on the rocks of the shrinking economy, and with the share price now around 15 pounds, the Next executives will have lost their money when the scheme matures in July. However, as Wolfson remarked ruefully when failure became likely, “it certainly motivated the participants”.

Double alas; Next itself has fallen into the hands of the remuneration consultants, and 11 pages of the latest accounts are devoted to the remuneration report. The blizzard of incentive plans all sound as though they need superhuman performance for the executives to collect, but in truth it’s impossible to know. Perhaps Peter Job should take a look.