FINANCIAL VIEW : A year after Greenbury, the gravy train still runs

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The Greenbury inquiry into top pay was about rewarding high performance in the boardrooms of Britain and avoiding payments for failure. So what does the inquiry's own performance look like, exactly a year after its report was published?

The scorecard shows some resounding successes, some fudged issues, a few serious loopholes - and at least one unwelcome and unexpected side- effect: the much vaunted long-term incentive plans, meant to replace share options, have turned into another gravy train.

This has been highlighted by controversy over generous long-term awards at United Utilities, the product of a merger between North West Water and Norweb. Several big shareholders have threatened to vote against the bonus scheme at next week's annual meeting.

But beyond all these reservations, there are serious questions to be asked about the performance of non-executive directors, whom Greenbury thrust into the front line by giving them the job of determining pay. Despite the widespread exclusion of executive directors from remuneration committees, as a result of the Greenbury report's recommendation, many non-executives still act like poodles of the chief executive. More of this later.

First, the most basic and lasting achievement of the Greenbury report is the requirement for detailed disclosure of every director's pay and benefits, written into the Stock Exchange rulebook and the Companies Act, which is an undeniable breakthrough for shareholders.

The change is not without minor drawbacks in the short term. Disclosure may actually be raising the going rate for directors' pay, since the greater the amount of information circulated, the more there is scope for "me too" demands.

There was also an unsatisfactory fudge over pensions disclosure, the result of which is that shareholders must get out their own calculators if they want to know the exact capital value of directors' pensions.

A more serious difficulty, stemming from a let-out clause in the Greenbury report, is the attempt to restrict rolling contracts to one year, to prevent large pay-offs on dismissal. The report said: "There is a strong case for setting notice or contract periods at, or reducing them to, one year or less ... In some cases notice or contract periods of up to two years may be acceptable."

As an analysis by Pirc, the shareholder consultants, pointed out this week, the exception has become the rule. Around 60 per cent of companies find special reasons why their directors should have contracts longer than a year, though the worst abuse, the three-year roller, does seem to have nearly disappeared (a trend which was well under way before the report was published.)

Furthermore, the attempt to outlaw outrageous pay-offs to departing directors seem to have been simply ignored. Pay-offs at the top 250 companies in the first six months of this year, at more than pounds 20m in total, almost equal those in the whole of last year.

The most glaring difficulty, though for a different reason, is with Greenbury's recommendation that long-term incentive plans should replace share options, which had fallen into disrepute because they rewarded directors mainly for a rise in the market. Greenbury said the new long-term plans should be based on "challenging performance criteria".

Though old-fashioned share options are fading in popularity, the new long-term plans have caused widespread disquiet among shareholders. They are often excessively complex and around half of those published so far do not give enough information to calculate maximum rewards.

According to New Bridge Street Consultants, the executive pay specialists, annual reports up to the end of March showed that 70 per cent of long- term incentive plans paid out for below median performance and in more than 30 per cent there is some reward for directors provided performance does not fall into the lowest 25 per cent. This makes a mockery of the attempt to make pay performance-related. The widespread assumption last year that long-term performance-related plans would lead to pay restraint also looks, with hindsight, rather naive.

Pirc calculates the potential rewards of long-term plans at up to 400 per cent of basic remuneration. A survey by the Independent found 100 per cent was the typical reward of long-and short-term schemes combined, while New Bridge Street said many companies offered between 50 and 100 per cent of salary and one company reached 200 per cent of salary.

Another trend with a huge gearing effect on earnings is to set long- term bonuses by using a multiplier of short-term bonuses as, for example, at Railtrack. Yet another approach likely to be unpopular with institutions was seen when United Utilities raised basic pay sharply at the same time as introducing a long-term scheme, which may also multiply the eventual benefits.

The Greenbury report suggested three years as the minimum for these schemes, if they are to give directors the same interest in long-term company performance as their shareholders. But three years have quickly turned into a maximum, because it has become the performance period at more than 90 per cent of companies, according to Pirc.

But as one of the Greenbury Committee members pointed out this week, a year is a brief period for changing corporate behaviour. After all, the greater disclosure levels now in force do give shareholders the information they need to make their presence felt more effectively. Companies are, significantly, obliged by the Stock Exchange - as a result of Greenbury - to put all new long-term schemes to a shareholder vote.

An indisputable achievement of the report is that it has given a push to a slow but significant cultural shift, in which companies have become more aware of what is acceptable to shareholders and public opinion, and institutional shareholders have begun to realise that occasional lobbying behind closed doors may not be an adequate way of carrying out their duties as owners of half of corporate Britain.

On the other hand, the experience of the first year has highlighted one of the difficulties with the currently fashionable doctrine of corporate governance, as devised by the Cadbury report on the conduct of boards, and reinforced by Greenbury. Both of these committees proposed giving an independent role to non-executive directors, who are supposed to oversee their executive colleagues.

The recommendation at the heart of the Greenbury report is that executive remuneration should be determined by committees composed entirely of non- executive directors. The vast majority of large public companies have complied.

But is the proposal, which assumes that non-executives will be reasonable and genuinely independent in their assessment of pay, working?

Certainly, the generosity of some of the new long-term incentive schemes, which are no more than disguised pay rises, suggests that in practice many non-executive directors are as compliant as they ever were with the wishes of their executive colleagues. The chief executive may have removed himself from the remuneration committee's meetings, but his influence remains overwhelming.

Not all non-executives do what they are told, but most seem to be responsive to suggestion, to say the least. A Coopers & Lybrand survey earlier this year found that the majority of executive directors saw the determination of pay by a remuneration committee as "purely cosmetic".

It said: "In most instances the chief executive will provide the impetus for the committee's work; all companies found this a desirable way to work rather than see the committee functioning independently from the executive directors."

If this is true, the cultural shift that the Greenbury committee hoped for will be delayed until non-executive directors themselves take a much firmer stand on pay. Frank Sanderson, chairman of United Utilities' remuneration committee - who has been a director of the North West Water arm of the group since 1983 - is finding himself under pressure from institutional shareholders to do just that.