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The corporate gravy train is still on track but is the mood shifting?

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Nils Pratley

Monday 14 September 2009

The gravy train rolls on. Choose your own favourite from today’s reports – though the £80m that Bart Becht has collected in three years from Reckitt Benckiser may be hard to beat. The wider picture is told by the 10% rise in basic salaries in the boardrooms of Britain’s big public companies last year.

Remember this figure when directors and their pay consultants tell us that a new spirit of moderation came with the recession. Yes, it’s likely next year’s survey will show a lower figure; it may even reveal that many directors’ salaries were frozen in 2009. But it looks as if the same directors stiffened themselves for the task of managing in hard times with a  long drink at the bar.

Is it too cynical to suggest the thinking went like this? “We’d better top up on basic salaries because we can no longer rely on the performance-related stuff to pay out so well?” No, it’s not too cynical, it’s what two decades of “performance-related” pay have taught to us to expect.

In sunny times directors want to claim some of the fruits of success; in rougher climates they expect more for turning up. The system encourages short-term thinking and volatility, which, funnily enough, is exactly what the FTSE 100 has delivered. After two booms and busts, the index stands where it was in 1998; boardroom pay does not.

A fine insight was provided this year by Shell, whose pay committee awarded £3.6m in bonuses to executives even though performance targets were missed. The justification was that the scheme allowed the committee to apply “discretion”. Shell’s cheek was so bare-faced 59% of shareholders voted against the pay report.

Such a rebellion at Britain’s largest company was highly unusual. It prompts the question of whether the mood is shifting. There are one or two signs. Sir David Walker’s report into the governance of banks usefully asked questions of non-executive directors and pay consultants. If a remuneration report attracts less than 75% support, the chairman should stand for re-election in the following year, Walker suggests.

That’s a principle that could serve across the corporate landscape. And, if Walker also proposes that financial firms reveal annually the fees paid to remuneration consultants, why not apply the requirement universally? Let’s see who is funding a branch of consultancy whose interests are plainly aligned more with directors than with shareholders.

Such reforms would not amount to a revolution. The debate about boardroom pay is wrapped inside a wider discussion about the “stewardship” of companies. It is sad, but accurate, to report that the people who have barely joined this debate are those who stand right at the back of the chain of command. They are the trustees of pension funds. It is hard to imagine that much will change without their involvement.

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It was FTSE’s worst year ever – but not for executive pay

Simon Bowers and Julia Finch

The Guardian, Monday 14 September 2009

Directors at Britain’s largest companies have been insulated from the worst effects of the financial meltdown hitting their employees and shareholders by a series of often complex remuneration policies, the Guardian’s annual survey of boardroom pay has found.

Controversial measures include rises in annual basic salaries averaging 10%, revised bonus performance targets to reflect tougher economic conditions and, increasingly, big cash handouts of up to 40% of basic pay in lieu of generous pension contributions.

Most FTSE 100 companies are freezing basic pay in boardrooms – but the Guardian survey shows that last year, as the recession loomed and months after the failure of Northern Rock, executive directors took far bigger rises than their staff.

This year, for instance, British Airways has imposed a freeze on basic boardroom pay – but the annual report shows that its chief executive, Willie Walsh, received a 7% boost to his basic pay last year. In June, the BA boss appealed for staff to work without pay for a month to help ease the financial crisis at the loss-making airline and, in a gesture of solidarity, said he would be doing a month’s unpaid work in July. The airline’s annual report, however, shows that on 30 June Walsh was due to receive a payout from a long-term incentive plan of 27,800 free shares – worth nearly £35,000.

In some cases, such as Barclays bank, where bosses have been forced to beg shareholders for capital injections just to keep their businesses from collapsing, company remuneration committees have quietly adjusted future share-based payouts for executives to ensure potential rewards are not diminished by the dilutive impact of crisis capital-raising. Rights issues increase the number of shares in issue and often drive down the price. Other companies which have shielded their directors from the impact of a rights issue on their bonus potential include Land Securities and Standard Chartered.

Shareholders saw almost a third wiped off the value of the FTSE 100 index in 2008, as well as being forced to inject billions into crisis-hit firms in rescue capital. Over a similar period, meanwhile, directors’ comparable pay packages, as disclosed in each company’s annual report, declined by an average of just 5%.

The biggest deals were mainly made up of shares awarded to executives several years ago released only after performance criteria had been met and a time period – usually three years – had elapsed.

The idea behind long-term incentive plans, known as LTIPs, is to align directors’ interests with those of their shareholders, but they can still pay out even if the share price has declined if they meet other performance targets – many of which are not disclosed.

In other cases, companies’ remuneration committees are able to use their “discretion” to make awards even if targets are missed. Earlier this year, Shell handed shares worth £3.5m to its directors even though they undershot the trigger point for payouts. Shell’s outgoing chief executive, Jeroen van der Veer, later suggested the payouts were unnecessary, as bonus payments made no difference to how hard he worked. Shell’s payouts sparked one of the biggest ever revolts among shareholders. At the oil group’s annual meeting in May, nearly 60% voted in protest at the awards – although they were powerless to halt the payments.

The Shell rebellion was one of many similar protests this year and was interpreted as a sign that big City investors might finally be ready to use their power to clamp down on pay.

But fund management bosses – such as Michael McLintock at the Pru and Michael Dobson at Schroders – also appear in the best-paid tables, making it hard for them to make a stand against executive pay hyperinflation. One fund manager said: “It is almost impossible for us to vote against excessive pay when our bosses are making the same.”

Some of the biggest pay packages of 2008 are the result of departing executives cashing in huge share awards – even if their tenure was far from a success. BT’s François Barrault left with £3.4m, though the dire performance of the Global Services division he headed forced the telecoms company to take a £1.6bn hit and axe 15,000 jobs.

Vodafone’s Arun Sarin was widely reported to have walked away from the mobile phone group with £8m. In fact the small print of the annual report shows he received £13m – including a £500,000 relocation allowance to cover the cost of him moving back to the US.

Big benefits packages, including deals to cover the cost of moving house and insulate directors against falling house prices, also boost overall pay deals. Before his departure, Barrault was able to forward to BT his bills for school fees, social club memberships and even his own financial adviser.

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