Procter chief takes bonus cut: Heavy losses in derivatives trading take toll at household products group

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The Independent Online
THE CHIEF executive of Procter & Gamble, one of a series of companies that suffered steep losses in derivatives investments earlier this year, has asked to have his annual bonus cut as a result.

In a filing to the US Securities and Exchange Commission, P&G said that Edwin Artzt would take a dollars 100,000 (pounds 65,000) cut in the profit-incentive portion of his 1994 earnings, which will nonetheless rise to dollars 2.29m (pounds 1.5m). P&G announced in April that it would take a dollars 157m pre-tax charge because of hedging losses suffered in interest-rate swaps with its bank, Bankers Trust.

P&G later admitted it did not fully understand the financial instruments, and in May established a risk management council that Mr Artzt said was designed to make sure that such problems did not happen again.

Shareholder rights groups, which have pressed for a closer link between corporate performance and pay, said Mr Artzt's compensation will still rise more than 8 per cent over 1993 levels despite the cut.

P&G said it has a long-standing policy that variable, at-risk compensation should make up a significant portion of executive compensation, and said that anywhere from 40 to 60 per cent of its managers' pay is affected by shareholder losses.

In the filing, the consumer products company said Mr Artzt did not feel he should receive his full award in a year in which P&G was hit by such charges. P&G's compensation committee accepted his compensation reduction request even though he was not involved in the transactions, it said. It also said Mr Artzt was not aware of the problem until shortly before the public disclosure in April.

P&G then threatened to sue Bankers Trust for the losses. A company spokesman said that option was still under consideration.

In their safest and simplest form, swaps and options give buyers financial protection against adverse moves in interest rates and foreign-exchange volatility. But more exotic products, which can be temptingly profitable to companies managing their cash holdings, can magnify losses logarithmically when market conditions take an unexpected turn.

Rising US interest rates thus caught many corporate treasury departments off guard early this year, transforming profitable investments in what were supposedly risk-hedging tools into multi-million writeoffs. In the same week P&G reported its charge, which translated into a dollars 102m loss for shareholders after taxes, companies ranging from Dell Computer to Gibson Greeting Cards revealed lesser losses in derivatives.