David Prosser: M&S sets a dangerous precedent

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The Independent Online

Outlook The £15m potential payday for Marc Bolland, the incoming boss of Marks & Spencer, may look puny compared to some of the packages that leading bankers enjoy, but there are some aspects of the deal that should worry us.

In particular, as the corporate governance group Pirc pointed out yesterday, the fact that M&S has seen fit to compensate Mr Bolland for loss of potential earnings from his previous employment, as chief executive of the supermarket group Morrisons, makes a mockery of the idea of rewarding long-term performance.

Mr Bolland is receiving around £7.5m from M&S in lieu of bonuses and share options that he would have been in line for had he stayed at Morrisons until 2012. The retailer is certainly not alone in offering these type of compensatory payments when trying to recruit senior executives, but this is not a trend that shareholders should welcome.

After all, the whole point of performance plans and incentive schemes that pay out over a number of years is to encourage executives to hit targets over extended periods. If you know that you can jump ship before hitting those targets or serving those periods, and still get the big payday, then the logic of these deals is pretty flawed.

M&S clearly wanted its man. And the retailer is keen to point out that while it is offering some pretty generous bonuses of its own should Mr Bolland's performance be up to scratch, his targets will be demanding. Fair enough. But having decided to pay its chief executive such generous compensation for his former role, M&S could hardly complain if another company came along and pinched Mr Bolland with a package that pays up the benefits it has promised him.

This shouldn't be read as singling out M&S for criticism (though the retailer ought to be ultra-sensitive to corporate governance concerns given the run-ins it has had with shareholders in the recent past). As I say, plenty of other companies now feel obliged to behave in this way when recruiting senior staff.

But think about this practice in the context of banking. One reform now universally accepted in the investment banking sector is that bonuses for senior executives should be paid out in company stock that can only be vested over an extended period. The idea is to discourage bankers from taking excessive short-term risk in search of a mega annual bonus.

What if, however, banks recruiting star traders take the M&S approach to hiring, compensating their new staff for bonuses foregone elsewhere? That would run counter to the aim of encouraging bankers to be more prudent and long-sighted – and encourage a potentially dangerous return to pre-crisis behaviour.