Margareta Pagano: Why winners should not be able to take all
Sunday 03 April 2011
Irene Rosenfeld, chairman and chief executive of Kraft, is being paid a $2.1m (£1.3m) cash award for her work last year. But that's only the icing on the cake: her total pay is a whopping $19.3m. According to Kraft, Rosenfeld is being paid the cash award part of the package even though she didn't meet all her financial incentive targets. This is mainly because she improved the "talent pipeline" by helping persuade certain Cadbury directors to stay on after the controversial bid.
Of all the defences for awarding high pay, this takes the biscuit. On what possible basis should Rosenfeld be paid more for getting people to stay on? Isn't that what her basic salary is for? To suggest that this is extra begs the question of what she is doing the rest of the time.
Flying a lot is one answer: Rosenfeld also benefited from the personal use of Kraft's company jet to the value of $88,838. That's a lot of flying and maybe answers why she hasn't had time to appear before the Treasury select committee to explain why Kraft didn't honour agreements made during the Cadbury bid. She's now snubbed the committee twice by not turning up.
Rosenfeld's exorbitant pay – and the feeble excuses made for it – are important for us to understand as British companies have been following the lead set by the Americans for the past two decades, and are doing so again today by paying ever more to a lucky few. Over recent months there have been more and more examples of corporate pay soaring again.
It's been some years since US economist Robert Frank wrote The Winner-Take-All Society, which highlighted how a few at the top were taking more and more while those at the bottom were being squeezed.
New figures from Professor Robert Wade of the London School of Economics show how US society became highly polarised in the 1920s, becoming more egalitarian between the 1950s and the 1970s. It has now returned to a high. Wade reveals that 1 per cent owned 22 per cent of national income in 1929 and 8 per cent in the 1970s. That is now back up to 22 per cent.
In the UK there are similar patterns – half of all the UK's households own 91 per cent of the nation's wealth. Yet the low to middle paid are getting throttled, with 2010 being the first year in three decades during which after-tax incomes fell. They are likely to keep falling. At the same time, corporate pay has been rising at about 15 per cent per annum over the past few years and set to continue soaring. Frank didn't know exactly why this divergence is happening although he puts some of it down to "human capital theory" – the idea being that really clever people earn more.
This isn't new: Adam Smith noted disparities 200 years ago in The Wealth of Nations. But the divergence is even greater today, which economists suggest may be due to technology now allowing people to broadcast their talents to bigger audiences. This explains why pop stars and footballers get so much, but not why corporate bosses like Rosenfeld or UK bosses like the Prudential's Tidjane Thiam, Marks & Spencer's Marc Bolland and others are set for big rises while their businesses are going through tough times.
The oddest thing of all, though, is how these bosses feel right about taking so much while their peers are squeezed. Could it be that's why they are clever? Or is it that shareholders are getting dumber as they don't dare stand up to them?
Nasdaq muscles in on Deutsche/Euronext deal
After weeks of speculation, the US Nasdaq OMX exchange, together with the futures market, IntercontinentalExchange, finally announced that it is gate-crashing the merger of NYSE Euronext with Deutsche Borse with its own $11.3bn bid. It wasn't surprising that shares in Deutsche, run by Reto Francioni, crashed by 4 per cent within minutes of the rival bid being disclosed, as investors fear that once again the German exchange is going to be left out in the cold. It's starting to be a habit – 11 years ago Deutsche's proposed deal with the London Stock Exchange was thrown out by rebel LSE members, while talks with NYSE Euronext also fell apart. Nasdaq's bid is at a 19 per cent premium to Deutsche's, so it doesn't look as though the Germans will come up with a counter-offer. This is the moment for London's Xavier Rolet – also planning a merger with the Toronto Stock Exchange – to call Francioni to see what they can come up with. A deal between Europe's two biggest markets is the one that still makes the most sense.
Who will win? NatX chiefs and the status quo, or investor Elliott and a rattling ride?
So who is right at National Express? The American activist Elliott Management hedge fund which, with 17 per cent of the shares, wants three new independent directors on the board to rattle the business a little more? Or John Devaney, NatX's straight-talking Lancastrian chairman, who wants Elliott quietly to go away and leave him to straighten out the rail-to-bus business?
But it won't. It's one of the oldest hedge funds in the business – dating back to the 1970s – and loves nothing better than a good scrap. And it's used to waiting to get its way, often with the help of the courts, and making money – returns to investors average more than 14 per cent per annum.
Elliott wants the new directors to bring better knowledge of other transport industries, particularly in the UK where you get better results by integrating rail and bus. It also has a good point suggesting that directors should have more experience of the US, where bus companies are doing "curbside picks" between cities for students and commuters. This makes sense, especially as the US is a growth market where NatX has big bus depots.
Devaney and chief executive Dean Finch claim Elliott wants the directors to push for a takeover – Stagecoach is still seen as a potential bidder. It's true that Elliott would make a handsome profit, having bought most of its shares at 180p during the rights issue and some at 200p. Shares are now 245p.
But Elliott rejects these charges, claiming that it's a big fan of both Devaney and Finch. What's really interesting, though, is whether it will get support from Spain's Cosmen family, which owns around 20 per cent of the shares. It would seem bizarre if the two biggest shareholders haven't talked. It's going to be fascinating to find out what the mood is when NatX meets its investors in Madrid next week. If Devaney is smart he could offer Elliott an olive branch – and save money on search fees by recommending at least one of the directors.
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