Comment: High–fidelity sound on remuneration front

Martin FlanaganMartin Flanagan
Martin Flanagan
IN TERMS of delayed executive bonuses, five years is rapidly becoming the new three years. At the height of the financial crash, and indeed for quite a while afterwards, two or three years was normally the required period of time for executives to hold on to stock options as part of long-term incentive plans (LTIPs).

But investor sentiment has hardened against such relatively short periods for directors and rainmakers at companies to cash in on those bonuses.

Fidelity chief investment officer Dominic Rossi says now nearly half of FTSE 100 businesses insist executives hold stock options for a minimum of three to five years. The figure was a disappointing 17 per cent at the start of 2013.

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Fidelity, one of the biggest institutional investors in the UK and mainland Europe, is one of those which has put its money where its mouth is.

The fund manager said last year that it would oppose any LTIP that allowed executives to cash in stock options within three years, and has now gone a significant step farther by saying that from next year it will vote against any plans lasting less than five years.

Five-year compliant has become a bit of a buzz phrase in the fund management industry, with major companies such as Anglo American, AstraZeneca and BT signing up to it.

The development is to be welcomed. Five years better aligns the long-term interests of executives and shareholders. While some disastrous corporate takeovers or flaky organic strategy become apparent pretty quickly, other times it is several years before the jig is up.

Five years is a good golden mean of tying executives into the results of their strategy by denying them cascading stock options for a decent period, without delaying payout for so long that it seems to bosses like some faraway nirvana rather than practical incentivisation.

Fidelity’s high profile on this campaign may lead to some frostiness in its boardroom relations. But it won’t do it any harm in the corridors of power, with Business Secretary Vince Cable enthusiastic about getting fund managers much more active in the pursuit of healthy remuneration policies at Britain plc.

Pain continues for outsourcer Serco

The phrase baptism of fire seems appropriate since ex-Aggreko boss Rupert Soames took up the reins at troubled outsourcing firm Serco.

He has taken over the helm at a company which, like most big outsourcers, has had a difficult reputational time of it. Serco has announced a cash call, which one would not assume in the circumstances is a gimme for investors, but yesterday said it expected to write down the value of some of its bigger loss-making contracts.

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These include its asylum seeker Compass contract and a clinical healthcare project Provisions of about £10m to £15m are expected.

It looks like Soames has decided kitchen-sinking is the order of the day to try to at first stabilise a listing company before hopefully restoring it financially and reputationally.

The relatively modest reaction of Serco’s share price yesterday to the latest bad news shows that institutional investors and the analyst community are relatively phlegmatic about the strategy.

The truth is Soames earned at lot of Brownie points with the fund management community in his lengthy and successful stewardship of Aggreko and they are cutting him slack now for it in taking on Serco’s many challenges.

Keeping those investors on side will mean the business having to hold the line on the organic trading front, demonstrating the essential resilience of the business model, while cutting losses on any activity that is deemed not to be washing its face.

My guess is that Soames probably has 18 months grace to show it can be done before we hear any sounds off stage.

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