Largesse from boardrooms: Public anger has done nothing to halt huge salary hike for top executives. Russell Hotten reports

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The Independent Online
SIR Anthony Tennant, former chairman of Guinness, owes members of the company's remuneration committee a drink or two. He can certainly afford it.

The five men who decided that he deserved a 25 per cent pay rise, despite Guinness's 12 per cent drop in profits, have put the spotlight back on executive compensation.

But it was not just his pounds 777,000-a-year final salary, revealed last week, that raised eyebrows. Pegged to it was an annual pension of up to pounds 500,000, thought to be one of the highest in British industry. The pension is boosted by Sir Anthony switching contributions from his 19 years at Grand Metropolitan. Nevertheless, most of the money is coming from Guinness as a reward for Sir Anthony's five years' service at the drinks group.

To many, it seems that company boards are impervious to public criticism of the lavish remuneration enjoyed by the UK's senior businessmen. Since 1980, executive pay in the country's biggest companies has been rising at an average of about 20 per cent a year. According to the Institute of Management, the chief executives of large UK companies were paid about nine times national average earnings of pounds 7,644 in 1983. By this year, they were taking home 14 times the average earnings of pounds 15,800.

This period of rapid executive salary growth covers two recessions, which saw unprecedented job losses, high unemployment and the pay of ordinary workers rising at historically low rates. In that climate, huge executive pay hikes look crass.

The inevitable criticism has not only come from traditional quarters such as the Labour Party. The Institute of Management has called some managers greedy, and even the Prime Minister has expressed concern.

It is not as if Sir Anthony, 62, is going to sit back and enjoy his retirement from Guinness last December. He is being retained by the company as a consultant for two years at pounds 50,000 a year. And then there are his other jobs - as a director of Forte and Morgan Stanley and, very soon, Christie's.

Not that Sir Anthony should be singled out for having negotiated himself a good deal with the Guinness non-executive directors. Those who set his pay and conditions - including Sir Ian MacLaurin, Tesco's chairman; Dominic Cadbury, the chief executive of Cadbury Schweppes; and Sir David Plastow, chairman of Inchcape - have remuneration committees to ensure they also get the going rate.

Certainly, they all know a thing or two about high pay. Sir Ian's remuneration, for example, caused a furore in 1991 when it did one of the most impressive expanding tricks ever seen in British business. It leapt from pounds 390,000 to pounds 1.5m, thanks partly to a generous bonus scheme introduced three years earlier.

Sir Patrick Sheehy, chairman of BAT, the tobacco and insurance group, may have drawn criticism last month when it was found that his pay rose 54 per cent to almost pounds 1m. But he can point to the independent directors who set the level - Lord Armstrong, the ex-Cabinet minister; Lord Cairns, the financier; and Sir Campbell Fraser, a former CBI president. They, no doubt, can point to the pay consultants who advised them.

In America, there is even more concern about salaries, share options and perks. While companies are losing money and workers their jobs, a survey by Business Week magazine found that the average pay last year for a chief executive at a big US company was dollars 3,842,247 ( pounds 2,447,000), a rise of 56 per cent on 1991. Senior executives in Britain and America are now well ahead of their colleagues in Japan, Germany and France.

At least BAT saw a big leap in profits, unlike many UK groups whose executives enjoyed large pay rises. And although Guinness profits fell last year for the first time in 13 years, the company points to Sir Anthony's acknowledged track record at the company.

During his tenure, Guinness's market value rose from pounds 2.7bn to pounds 12.4bn. 'Sir Anthony helped to make a lot of people rich along the way,' said a company spokesman. 'He joined us at a difficult time after the resignation of Ernest Saunders and the scandal at the time. It was a hell of a risk to leave Grand Met. It would have been difficult at that time to attract someone of his experience.'

Yet as one institutional shareholder told the Independent on Sunday: 'Sometimes you think these people just take no notice of criticism. OK, some have excellent track records, but is that really a justification for massive pay packages?'

For Chris Higson, assistant professor at the London Business School, part of the problem is that remuneration committees are composed of like- minded executives. 'There is a tendency for the members to be the friends and acquaintances of the chairmen and chief executives,' he said.

Jon Moynihan, chief executive of PA Consulting Group, is appalled at the spiralling rise in executive remuneration but believes those receiving the rises are not necessarily to blame.

PA polled the UK's top 400 companies on how they arrived at a compensation package for their top people. Mr Moynihan said: 'The objective of remuneration committees is usually to pay above-average salaries to attract above-average talent who can be motivated with the right package. No company sets out to attract just average people.

'So they hire compensation specialists to find out what the average base rate is, and then pay, say, 10 per cent more. The snag is, every company is doing the same. The average is always rising, and the result is an exponential explosion in pay.'

Mr Moynihan's answer is to reduce the average base pay - say, by 10 per cent - but then increase the bonus significantly for executives who perform well. He said: 'There is no better objective measure of performance than a rise in the share price. The individual earns less than the competition unless the price goes up.'

Share options, pensions and other benefits can all be linked with this incentive to perform. Too often, however, share options are just a short-term incentive.

Mr Higson has studied the relationship between performance and remuneration packages. He fears that many reward schemes 'encourage short-term behaviour at the expense of the longer-term interests of the organisation'. In other words, if an executive's remuneration is dependent on short-term earnings and profitability, long-term investment decisions that could dent those rewards may be deferred.

A study last year by the London School of Economics - the most thorough so far carried out into executive pay in Britain - found that there was virtually no correlation between high pay and company performance in the UK.

Among the sample of 288 large companies, share price and dividend performance are 'very weakly linked' to executive pay increases. From 1988 onwards, that link vanishes - although executive pay continued to increase rapidly.

The standard attitude of institutional shareholders to a highly paid executive is that his salary is a mere drop in the ocean of a company's total costs, and paying him a few hundred thousand pounds more or less does not matter. Traditionally, therefore, they rarely object to high pay awards.

But the LSE study suggests that pay levels do matter. Although high pay is not a reflection of good performance, it is a reflection of size. When a company's turnover rises, its executive pay tends to rise, too. This gives executives an incentive to go for needless acquisitions to boost the size of their companies.

Reforming the system of executive pay seems a Herculean task, which has hardly begun. Sometimes it looks as though companies are more concerned with keeping contractual details secret from shareholders and the press than with reforming their systems. Only this week, it was disclosed that Barclays Bank had changed the way in which top directors are paid to prevent public inspection of their remuneration.

Under company law, directors' contracts can be inspected three weeks before an annual meeting, but not if those contracts are for less than a year. Barclays has altered its directors' contracts so that none have a service agreement of more than a year. The bank denied the change was to conceal the contracts.

Mr Higson believes full disclosure is vital if companies are to win back the confidence of shareholders. 'Without access to information, outsiders are heavily dependent on the adequacy of internal monitoring by the remuneration committee. At the moment, the power of the committee is in the eye of the beholder. It is what the company wants it to be.'

He wants to see full disclosure of directors' emoluments and the basis on which the remuneration was decided. The Cadbury Committee has gone some way to opening remuneration arrangements to public scrutiny. The committee's call for greater powers and independence of non-executive directors will also help.

Unfortunately, these changes are unlikely to be enough. There is little evidence that disclosure alone is the solution. After all, disclosure requirements in the US are already well ahead of the UK, but pay and perks in America are rising at an ever faster rate. For the time being, therefore, British senior executives can look forward to an extremely lucrative future.

Ten ways to say pay rise

HERE are 10 arguments commonly put before remuneration committees to justify large pay increases for the chief executive.

1) We have to attract the best managers to this company, so our pay levels must be higher than our competitors.

2) The company has done brilliantly this year. The chief executive and his colleagues should be rewarded for their tremendous achievements with a big pay rise. They should also be promised even higher pay if they repeat their performance next year.

3) The company has done brilliantly this year. Another pounds 175,000 or so on the chief executive's salary is nothing compared with the millions of pounds he has added to shareholder value.

4) The company has done abysmally badly this year. But the chief executive is crucial to the corporate recovery plan. He must be paid more to stop him leaving to join a more successful competitor.

5) The company has done abysmally badly this year. But this was the fault of the recession, not of the management who should be handsomely rewarded for having limited the damage and prevented the company performing even worse than it did in such terrible trading conditions.

6) The company has done abysmally badly. The chief executive's pay must go up because he is working all the hours God gives to turn the situation around. He is, of course, working far harder than he did when things were going well and must be duly compensated.

7) A company of this size and standing must pay internationally competitive rates (in this case, 'international' means US pay levels, not those of Japan, Germany or France where executive pay is generally lower than in Britain). Otherwise, what is to stop the chief executive moving to the US?

8) The chief executive has employed a consultant, who has produced a jargon-filled report explaining that - according to all the objective criteria used in the executive labour market - his client's pay should rise substantially.

9) By any fair measure, the boss is grossly underpaid. He is, after all, a superstar in his own field. He ought, by rights, to be paid as much as Mick Jagger or Madonna. He is not even paid as much as those merchant bankers and lawyers in the City, although his responsibilities are far greater than theirs. But he is a reasonable and modest man, and he does not want shareholders to feel he is being greedy. So he is prepared to accept a mere 50 per cent increase in his salary to pounds 900,000, plus an addition to his share options and pension.

10) 'You scratch my back, I'll scratch yours.' Mr B, the chairman of the remuneration committee, is keen to be generous to the chief executive, Mr A, because he has something to gain. Mr B, after all, is the chief executive of a company whose remuneration committee includes Mr A, in his capacity as a non-executive director. Mr B hopes that if he raises Mr A's pay, Mr A will return the favour by raising his pay when the time comes.

(Photograph omitted)

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