Insurers may curb directors' bonuses

INSURANCE companies, which between them own 20 per cent of the stock market, are considering introducing guidelines to curb excessive bonuses awarded to some directors.

The Association of British Insurers' investment committee is understood to be examining remuneration packages in the wake of large increases paid to a number of directors of quoted companies. It already operates guidelines on share options, and industry sources expect it to draw up new ones on bonuses.

Its concern follows large bonuses paid to a number of directors, including a pounds 1m bonus to Sir Ian MacLaurin, chairman of Tesco, who received total pay of pounds 1.5m in the year ending in February 1991, and the pounds 108,000 bonus to Sir Malcolm Field of WH Smith who received a total of pounds 323,000 in the year to 30 May 1992.

Sir Ian's payment was linked to the 71 per cent rise in Tesco's earnings per share over the previous three years. Part of the WH Smith payout, however, covered 1990/1, when earnings per share shrank.

Prudential, Britain's largest life insurance group, has itself come in for criticism. Mick Newmarch, Prudential's chief executive, received a 43 per cent rise in salary to pounds 544,000 in 1990, when profits fell by 37 per cent. Part of the rise was due to a bonus based on the company's performance in 1989, when profits rose by 9 per cent.

Prudential has since introduced a new share-based bonus scheme to give senior management a long- term interest in its stock market price.

It is not just the size of payments that is causing concern to large investors but also the way they are calculated. Some are triggered by a single year's performance, some by a sustained period of outperformance.

Some are dependent on increases in share prices, some in earnings per share and some in pre-tax profits. For example, three directors of Evode, the glue maker fighting a pounds 90m bid from Wassall, will receive substantial bonuses depending on profits this year.

The insurers are particularly concerned about companies that pay bonuses to directors even when performance targets have not been achieved.

The ABI's share option guidelines are linked to sustained performance in earnings per share. But the National Association of Pension Funds, representing investors of pensions, recently proposed that options should be linked to share price performance.