ROLL up for the next round of the great executive bonus scrap. Heading the cast are Lord Hollick, Labour peer and former television and newspaper proprietor, and John Major, the former Tory prime minister, who could have been forgiven for thinking that a non-executive job at Mayflower, an engineering firm, would be a quiet backwater. He could be in for a surprise.
Shareholder action groups have flexed their muscles over the last month at Royal Bank of Scotland, creating uproar over the 2.5m ‘thank you’ bonus for directors after the NatWest takeover; they have no intention of stopping now.
The National Association of Pension Funds (NAPF) is expected within the next fortnight to issue a report condemning the 649,000 bonus awarded to Hollick, the former chief executive of United News & Media (which owned Express Newspapers and Meridien TV) who is still boss of the renamed United Business Media (UBM). Rewards for his fellow director, Charles Gregson, head of the business information division, will also come under scrutiny. The NAPF wants to reject the bonuses which were awarded to the men after the sale of United’s ITV assets and Express Newspapers.
Few would dispute that the disposals were smart pieces of business. The television advertising market went soggy almost from the minute that Hollick sold the Meridien, Anglia and Harlech TV franchises to Granada, which quickly followed its purchase with a profits warning. Its share price, and the advertising market, have yet to recover. Not that Hollick planned it quite so smoothly.
Plan A was a 8bn merger of United News & Media and Carlton Communications to dwarf Granada itself in terms of ITV assets.
But at least Hollick, once Granada’s mood turned ugly and the government was seen to be against him, had the good sense not to allow corporate ego to stand in the way of shareholder value. He sold, insisting on cash rather than Granada paper, a move that looks better and better with hindsight.
The NAPF, however, cares only for principles: it thinks that paying bonuses for the deal stinks, arguing that one-off payments for deals is an incentive to do deals in general, rather than an incentive to do deals that are good for shareholders. It is set to advise its members to vote against UBM’s remuneration policy at the May 2 annual meeting. The association is also expected to object to the two-year rolling contracts enjoyed by Hollick and Gregson, which would mean big pay-offs if they were to be ousted. Nor, for good measure, does it like the fact the bonuses are paid from pensionable earnings.
Then there is John Major, who famously condemned large pay deals as "distasteful" while in office. He will stand accused of turning a blind eye to excessive pay-outs at Mayflower where he is a non-executive director.
The Pensions and Investment Research Consultancy (Pirc), another player in the booming shareholder-representation industry, will recommend that shareholders vote against acceptance of the annual accounts in protest at bonuses given to Mayflower executives.
Stuart Bell, a spokesman for Pirc, said: "They seem to have significant discretionary bonuses and there doesn’t seem to be a clear justification for the bonus payments."
Major has not received the pay-outs and is employed to protect shareholder value. But he is likely to come under fire in the forthcoming row.
Some comfort may come from the fact they are in the best of company. Two major British companies, the Royal Bank of Scotland and Marks & Spencer, spent last week fighting off allegations of boardroom excess from increasingly vocal shareholder lobby groups. Royal Bank’s chairman, Lord Younger, was stalwart in his defence of a 2.5m bonus paid to directors following the takeover of NatWest. It was a "special recognition" of a "unique and transformational event", he said.
The deal certainly prompted special recognition in the outside world. While attempts by the NAPF and Pirc to vote two non-executives, Sir Angus Grossart and Sir Iain Vallance off the board failed, the protesters hit well above their weight in the media. Royal Bank’s annual meeting passed off largely without incident but outside the hall the debate raged.
By the end of the week ailing retailer Marks & Spencer was struggling with a similar row as it emerged that its Belgian chairman, Luc Vandevelde, could receive a pay a bonus and share deal worth 810,000. M&S could point to its own transformational events - the axing of 4,300 jobs, the closure of its European stores, the sale of US operations, its collapsing UK revenues - but they hardly indicated a creditworthy performance by Vandevelde. M&S has continued to flounder under his leadership despite promises to turn its fortunes around within two years.
Industry leaders say it is not the size of the packages but the thinking behind them that is important. Julian Samways, institutional marketing director at Schroders Asset Management, said: "We look for remuneration packages where there is clear performance criteria and the interests of directors are aligned with those of other stake holders."
As a major institutional investor, Schroders is well placed to comment but many have questioned whether it has followed its own sensible rules.
Its former chairman, Sir Win Bischoff, recently picked up a 5m bonus, with fellow directors getting pay-outs totalling 2.75m. Samways said: "Sir Win created significant shareholder value. We became a FTSE 100 company under him and he sold the investment banking business at a very attractive level."
Remuneration experts say it is why executives are paid, not how much, that is important. Damian Carnell, a principal at the pay consultants, Towers Perrin, said: "I think it’s fair to say executive pay has always attracted attention because pay at the top is huge in contrast to normal people’s pay. Companies that have an accountability to the public are more sensitive about it."
Payment should be linked to performance and value, added Carnell, not deals. If properly accounted for huge bonuses should be a good thing because they show a company in rude health, he said.
Weighty pay packages have always prompted some form of protest, whatever the justification. But those protests used to come only once or twice a year. The boss of British Gas, Cedric Brown, rapidly grew used to feline caricatures of himself as he was accused of creaming off value from the privatised utility to line his own pockets. Last year, Vodafone’s chief executive, Chris Gent, inspired a wave of indignation after he was awarded a 10m bonus for buying Mannesmann of Germany.
The spectacle of two very public pay rows being fought out in a single week, and the prospect of more in the near future, has unsettled many in the City.
Executives are beginning to wonder whether investor pressure groups are using new techniques to police standards of corporate governance. Another pay consultant said: "We utterly amaze Americans. Sometimes they think you’re joking when you tell them about these protest groups. They seems to have a remit of ‘huge pay is bad’ and whatever the performance scheme it ought to be made more difficult. Some of the guidelines the groups put on are just intolerable."
Companies competing in the global marketplace need to pay global salaries, the advocates of high pay insist. Holding back bonuses could put Britain at a competitive disadvantage.
With top footballers like Roy Keane believed to be earning over 50,000 a week, why should the best directors be paid any less? Are queues of angry analysts, customers and shareholders really less of a professional challenge than Bayern Munich’s back four?
A spokesman for UBM defended Lord Hollick. "Last year he realised 3.2bn from disposal," he said. "He crystallised value created by the group over the year." The spokesman said the company had been in contact with 26 of its 30 biggest shareholders to discuss the sale of its ITV businesses and none had questioned the pay-outs.
Yet despite the reassurances, protests against bonuses offered to a high-profile Labour peer who sold three national newspapers to a porn baron are sure to keep pay at the top of the media’s agenda.
Peter Montagnon, head of investment affairs at the Association of British Insurers (ABI), said his organisation held talks with companies in breach of its pay guidelines and is reluctant to go to the press while those negotiations progress.
He said: "There are always a number of companies that are in breach. We try to negotiate with them before they put their scheme to the vote. We monitor 850 companies. A substantial proportion of those seek approval of new schemes."
Yet despite this sort of influence, the ABI and its fellow shareholder groups often prove unable to vote down big pay rises, as in the case of the Royal Bank last week. If a company does not put its remuneration policy to the vote they can only try to vote out remuneration committee members.
Globalisation is likely to further wilt their powers, with foreign shareholders, who are less concerned about big bonuses, watering down their voting powers. The DTI shrank away from making votes on remuneration compulsory when it issued guidelines in February.
The government could have a change of heart when it reviews the Companies Act, but it will upset many more influential lobbies than it might please by doing so.
The ABI and NAPF seem to be relying on political correctness to make their impact. They will clearly generate lots of headlines by putting Hollick and Major in the spotlight; but they would surely have more impact if they were to confine their targets to serious underachievers - like Vandevelde of M&S.
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