'Packages richer than required'

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The Independent Online

The committee paid special attention to the privatised utilities because of the controversy over:

t Large increases in salaries following privatisation;

t Salary increases which coincided with job or pay cuts for employees;

t Awards of share options before share prices had stabilised.

The report said the remuneration committees of some privatised water and energy companies had developed, perhaps unintentionally, packages that were richer than required to recruit, retain and motivate quality managers. The richness lay in the combination of salary levels and share options.

Some committees had also seemed insensitive to the opinions of the company's other stakeholders and had misjudged the timing of their decisions and announcements. The qualities required of an executive director should command a premium where there is substantial competition and risk, a wide diversity of activities is undertaken and there is an international spread of operations and significant technological or structural change is under way. Few of the recently privatised utilities scored highly on these criteria.

There was a strong case for linking rewards to a company's performance compared with others in the sector and not rewarding directors for sector- wide share price increases which have little to do with their own efforts.

For future privatisations, remuneration committees will need to pay attention to what is truly required to attract, retain and motivate quality managers; to consider the case for long-term incentive schemes; to weigh the merits of share options against other forms of scheme; to set performance criteria which emphasise performance relative to other similar companies and do not provide rewards for general market movements; to establish a time gap of six months and preferably a year or more between flotation and the grant of share options or similar schemes; and to show sensitivity to other stakeholders' opinions.

For the existing privatised utilities, the report strongly recommends that all privatised utilities in the water and energy sectors should undertake a comprehensive review of remuneration packages in the light of the report, and if necessary, adjust them voluntarily.