Outlook: A damp squib from Hewitt, but that's better than fireworks

Liability insurance; Ryanair ascendant
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The Independent Online

Patricia Hewitt's consultation document on fat cat pay - "Rewards for Failure", Directors' Remuneration; contracts, performance and severance - is predictably and necessarily a damp squib. The Government has long made plain its aversion to legislating on this issue, and although yesterday's document explores the possibility of doing so, it is really only in the spirit of being seen to address a growing area of public concern. As a way of playing off an awkward issue into the long grass, this is a Whitehall classic.

As the document makes clear, it is virtually impossible to legislate on reward for failure without driving a coach and horses through contract law or interfering fundamentally in a company's right to set pay and conditions as it sees fit. Archie Norman's private members bill, now withdrawn, requiring compensation for loss of office to be "fair and reasonable" regardless of what the contract says, is cited to illustrate the difficulty of introducing meaningful legislation.

The Government says it supports the motivation behind the bill but questions whether it is appropriate to override or rewrite contracts in this manner and points to the difficulty of establishing a relationship between the performance of an individual director and the performance of the company as a whole.

As a general statement of principle, directors' contracts are for shareholders to decide. Government should have little if any say. However, when executive excess reaches a level that starts to damage the credibility and reputation of business as a whole, as it arguably has in recent years, then public policy plainly does have some role to play.

I don't want to act as the spokesman for the Trade and Industry Secretary, but she's already achieved much of the reform necessary to allow shareholder activism to flourish by making directors' remuneration and contracts more transparent and by requiring companies to hold a separate vote on remuneration policies. The vote against Jean-Pierre Garnier's pay at GlaxoSmithKline's recent annual general meeting is bears witness to the success of that policy.

As for reward for failure, there's not a lot that can be done about existing contracts, unless directors can be persuaded to give them up voluntarily. Neither Sir Terry Leahy, still clinging to his two-year contract as chief executive of Tesco, nor Sir Martin Sorrell, doggedly resisting pressure to give up a three-year contract as chief executive of WPP, look like being fired, but both see it as a matter of principle that their contracts remain as they are. I imagine that's even more the case in companies where the chief executive is about to get the bullet, for the shame of failure becomes a lot easier to bear when there's the compensation of a big pay-off.

In time, shareholder activism should correct the problem without the need for oppressive legislation. Yet companies need to respond too. Cult of personality has become a dangerously powerful influence across the corporate landscape, bidding up salaries and encouraging some appallingly high-risk acquisition strategies.

Good leadership is vital to all successful management, but the faith often vested in the supposed transforming powers of a single superhuman chief executive, justifying the payment of wealth beyond the dreams of avarice - and here the headhunters have a lot to answer for - is wholly inappropriate for many big companies, where outstanding long-term success is determined by team work, not individualism. The reward for failure debate won't go away, but Ms Hewitt should be congratulated on her measured approach to the issue.

Liability insurance

Damp squib number two. The Office of Fair Trading has been investigating the UK liability insurance market, where there has been growing concern over rocketing premium rates. Adequate liability insurance has been a legal requirement for all employers since the early 1970s, so it has come to be regarded by many companies as tantamount to a tax. Like other forms of taxation, it has been rising strongly - by 50 per cent last year with more to come.

In some forms of professional indemnity cover, the situation is now so bad that it is impossible to insure at all. For instance, some 22 per cent of Independent Financial Advisers have no cover, while 37 per cent have non-compliant cover, forcing the Financial Services Authority to grant waivers from insurance whose prohibitive cost the FSA has itself helped create through its persistent mis-selling reviews. For many small and medium-sized enterprises, liability insurance is becoming such a big cost that it threatens their very viability.

Yesterday's OFT report is an excellent resume of the nature and causes of the problem, but it offers little in the way of solutions. It's one obviously constructive proposal - that renewal periods be extended to a minimum 21 days to allow companies more opportunity to shop around - was already being incorporated by the Association of British Insurers into its code of best practice.

The problems afflicting the liability insurance market are much the same as those of insurance as a whole, only in exaggerated form because employees and customers are so much more likely to call in the lawyers in the hope of extracting compensation than they were. Steeply rising claims combined with shrinking capacity equals sharply higher premium rates.

As things stand, the market makes little distinction between the good employer and the bad one, which is clearly a structural failing, given the sometimes elaborate risk modelling used for many other forms of insurance. Yet as far as the OFT has been able to ascertain, there is no cartel, and with claims and expenses exceeding premiums by 20 per cent last year, there is no obvious rip-off going on here.

It is fashionable these days to worry about the prospect of deflation. Unfortunately, there is not much sign of it in insurance costs, or indeed most other forms of business cost.

Ryanair ascendant

According to the irrepressible Michael O'Leary, chief executive of Ryanair, it's only a matter of time before he starts paying passengers to fly his routes, so revolutionary is his business model. At the risk of labouring his own joke, bullocks!

Nobody should altogether discount the possibility that Mr O'Leary might occasionally try it on as a marketing ploy. Loss leading is after all one of the oldest tricks in the book, creating the illusion of rock bottom pricing when the reality is something very different. It is also the case that some remote Continental airports already pay Ryanair to land there in the hope of attracting tourists and business, another instance of how low cost operators are transforming the airline market to the good.

Yet the idea that Mr O'Leary will eventually be in a position to pay his passengers to fly with him is Alice in Wonderland logic reminiscent of the dot.com bust. One look at yesterday's figures - showing pre-tax profits up 59 per cent to €239.4m - shows that underneath the bombast Mr O'Leary is no mad hatter, and that he should be taken very seriously indeed when he says "we are going to destroy the airline business as we know it".

As if the pressure on the full service airlines were not already bad enough, he promises to cut average fares by a further 10 per cent this year, His aim of overtaking British Airways, Air France and Lufthansa as Europe's biggest carrier in terms of passenger numbers looks easily achievable. Ryanair is almost certainly overvalued as a company, but it is also part of the genius of capitalism. As the established airlines sink beneath mountainous losses, it's out with the old and in with the new.

jeremy.warner@independent.co.uk

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