Investors on warpath over directors' pay

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The Row over "fat cat" bonus schemes is set to escalate over the summer as institutions, already up in arms about over-generous plans at United Utilities, step up their campaign.

More than 100 large companies have schemes in the works, most of which are flawed, City institutions say. Investors, led by Standard Life, Prudential and Norwich Union, are preparing to step up their assault on "incentives" that reward even underperformance.

"We're doing everything in our power to encourage institutions to use their votes," said David Gould, manager of investment services at the National Association of Pension Funds. "Many funds are working on their own corporate governance statements. The current levels (of investor activism) are not high enough, but they're rising."

Last week, United Utilities, the merged North West Water and Norweb water and electricity group chaired by Sir Des-mond Pitcher, rebuffed demands to lower its bonus scheme. It will see see chief executive Brian Staples make up to pounds 120,000 in bonuses this year on top of his pounds 300,000 salary, for only middling performance.

At least eight institutions are planning to vote against the scheme at the AGM on Friday.

Investor hackles have been raised at a raft of similar schemes already passed. Among the worst offenders, investors say, are Midland bank owner HSBC, engineer GKN, ferry operator P&O and Energis, the telephone subsidiary of National Grid. Most of the privatised utilities are also high on the list.

Many firms are setting performance thresholds that will be too easy for directors to cross. "Incentive plans should have challenging and appropriate performance criteria," said a spokesman for the Association of British Insurers.

The full effect on directors' pay will only be seen when next year's annual reports come out.

Executive remuneration became a hot issue in 1994 when it was revealed that British Gas chief executive Cedric Brown received a 75 per cent rise to bring his salary in line with other private-sector bosses.

The Greenbury Committee on remuneration established in the wake of the row recommended that share options be replaced by long term incentive plans ("L-Tips") that would only kick in after performance criteria were met, and which would have to be voted on by shareholders.

Firms argue that they need incentives to get the most out of their managers, and that their schemes meet the, admittedly vague, requirements of the Greenbury Committee.

But Anne Simpson of Pensions and Investment Research Consultants (Pirc), which advises shareholders, said she could count on the fingers of one hand the L-Tips that are well designed. Among them is the one instituted by grocery chain Asda. Because it applied to all employees, not just directors, it had to be reasonable or the costs would spiral out of control.

Also receiving Pirc's stamp of approval is a plan by catalogue retailer Argos, which has a maximum bonus of pounds 25,000, or pounds 50,000 worth of shares. Others have been welcomed because they require bosses to put up their own money to get shares.

The highest payout so far is to directors of HSBC, who could share an extra pounds 16m in a plan fiercely criticised by shareholders because it is tied to growth in earnings per share, with an easy threshold of 2 per cent a year over five years.

Institutions are also upset with GKN, because it could be three quarters of the way down the league table for FT-SE 100 companies and its directors would still get a bonus.