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Retention bonuses

Times Online

Big boardroom pay deals can still make sense


Pay is back as a big issue and will remain so for some time. In a challenging market, like the one we are entering, boardroom compensation will be an emotive issue.

In the past week we have seen Royal Dutch Shell, the oil giant, face down a barrage of investor criticism over the award to three executives of one-off bonuses worth ¤1m (£797,000) to ensure they remain with the company. Glaxo Smith Kline, the drugs group, faced a similar investor revolt last Wednesday over a £2.5m payment to Chris Viehbacher. This is the man who missed out on the chief executive job to Andrew Witty. Glaxo’s chairman, Sir Christopher Gent, took the view that if he didn’t offer a retention package to Viehbacher, there was a big chance he would be poached by a competitor.

In America they call such payments “pay for respiration”. The public criticism faced by Shell and Glaxo — although directly related to retention payments — should act as a warning to other companies that, if they are tinkering with executive pay or proposing new schemes, they must explain them to investors.

Over the past five years executive pay has soared without too much protest from investors. In a rising market, a lot more is tolerated, particularly when executive pay is contrasted with the huge sums earned in private equity, banking and the hedge-fund industry.

Those days have gone and if Richard Lapthorne, chairman of Cable & Wireless, presented his controversial executive performance package to investors now, rather than years ago, it would be fascinating to see the reaction. Lapthorne’s plan was predicated on putting in private-equity-style remuneration to give his top talent an incentive.

The new era will be defined by corporate sobriety and the pay deal being put to investors this week by HSBC will test that mood. The first point to make is that this will not get turned down. Stephen Green, the chairman, has prepared the ground among his investors. Most like it because it matches bonuses with performance.

As we report on the front page, if the board does shoot the lights out over three years and hits all targets, the share price — if you use a conservative price-earnings multiple of 12 times — will go up by 50%. That is a good return for investors and the executives should be rewarded.

But there will be those who don’t like it and the issue is how loud their voice will be. Boards may have to get used to 75% majority support instead of the usual 95%. In other words, shareholder abstention will become more common.

Large performance packages make good headlines, but it is rare that they are attained. Take Sir Peter Davis when he took over as chief executive at J Sainsbury. His potential reward was huge but he eventually left with his tail between his legs. Similarly, there was much discussion at Next, the fashion retailer, but the share price is now so far under water, that the payout will never be made. The same could apply to HSBC, but the prospect of a big pile of cash is a healthy target to aim for.

Time to spread wings

Memo to Sir Stelios Haji-Ioannou: ignore the doubters, there is a good deal to be done. I am talking about Easyjet, the low-cost airline that he founded. High oil prices have torpedoed the company’s share price, and Haji-Ioannou should think about taking it private.

There is risk involved, of course. Not so much commercial risk, although that is of course present, in that oil prices could rise so high that Easyjet is wiped out altogether. What will weigh more on Haji-Ioannou’s mind, however, is the reputational risk involved in such a deal. The City takes a dim view of tycoons who buy back the companies they set up. The obvious example is Sir Richard Branson, Haji-Ioannou’s inspiration to go into the airline business. Branson floated Virgin on the stock market, then bought it back, an act that for some time clouded the City’s opinion of him.

There is no objective reason for these prejudices — if someone wants to buy something they are free to do so and, if institutions moan about it, then perhaps they should have valued the shares properly in the first place — but that does not mean they don’t exist.

Easyjet closed on Friday at 265¾p, the shares having traded at 663p in the last year and having at one time reached 730p. And unless you subscribe to the apocalyptic view on oil prices, then aviation remains a cyclical industry, and will have its day in the sun again. Easyjet has cash, cheap aircraft, and a decent brand, all the things it will need to survive the downturn. It even has a fleet of aircraft it could quickly dispose of if it needed to shrink fast. Any number of investors must be thinking about buying it. The big obstacle is Haji-Ioannou himself, who with family members speaks for nearly 40% of the shares. It would be almost impossible to do a deal without his backing. So come on Stelios, why not do it yourself?

Unhealthy outlook

The healthcare sector is notoriously cyclical and we are on the cusp of another downturn. Local authorities are reining in budgets and costs are going up. At Four Seasons, a privately owned nursing-home chain, the Qatari owners are having difficulty pushing through a £1.5 billion refinancing and it will only work with a big capital injection. It would be surprising if Southern Cross, the quoted healthcare chain that is valued at £756m, was not feeling similar pain. Its shares have already slipped from above 600p to 402p and, based on what is happening in the industry, could have further to fall.

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