Marconi revives City anger over boardroom pay excesses

Rebasing of executive options is latest example of rewards failing to reflect performance

Is it the era of the fat cat here again? Tuesday's announcement by Marconi that the telecoms equipment maker is rebasing its executive share option scheme to take account of the company's collapsing share price is just one example of an apparent return to boardroom excess at UK plc.

In the last few months, Sir Peter Bonfield, the BT chief executive, received total pay of £2.9m for the year in which the company was brought to its knees under a mountain of debt. We have also seen Sir George Mathewson of the Royal Bank of Scotland say that his £769,000 bonus for masterminding the NatWest takeover wouldn't buy you "bragging power in a Soho wine bar".

In April, Lord Hollick faced a stormy annual meeting over his receipt of a £649,000 bonus for selling chunks of his United Business Media empire. And this year Alan Smith, the chairman of Mothercare, doubled his money for stewarding the group towards an independent future after the break-up of Storehouse, the perennially underperfoming retail group.

All this sounds remarkably similar to the first round of fat cattery in the mid-1990s when utility bosses such as Cedric Brown of British Gas were lambasted for tasking liberties with shareholders' money.

Corporate governance bodies have been urging caution for some time. John Rogers of the Association of British Insurers says: "I don't think it is out of control, but I think shareholders would like more tools to use to ensure a proper balance."

Peter Montagnon of the National Association of Pension Funds adds that the economic cycle was another factor in the current furore: "It is natural for public attention on these matters to increase and for institutional action to be more intense when the stock market is weak, and there are greater dangers of people being rewarded for performances that have not brought value."

A new study due from the remuneration specialist SCA Consulting is expected to show that total pay among directors of FTSE 100 companies grew by 6 per cent last year, despite the weak stock market. Though performance-related elements such as bonuses fell, increased fixed pay such as salary more than made up for it.

Marconi underlined this trend with pay figures published in its annual report this week. Though the total pay of the executive directors fell from last year because of the absence of bonuses, this was offset by big increases in pension contributions. The result was that total benefits actually increased, despite the share price falling to new lows.

But the net is closing in. Institutional investors have historically been averse to making a fuss about boardroom pay because they often earn more themselves. But they are becoming more active as pressure grows from pension fund trustees.

Marconi, for example, faces a tough challenge to secure shareholder approval for its plan to halve the exercise price of its director share options. "There can be no misunderstanding," says Guy Jubb, the investment director at Standard Life, which holds a 2.2 per cent stake. "These proposals are a contract for future performance by the executive team, and failure to perform will carry a high price."

Reform is being urged both by shareholders and the Government. In April, a group of Britain's leading institutional investors joined forces to reform how director bonuses are awarded. Led by the fund manager Hermes, the group of investors wrote to 750 of the UK's largest companies, urging them to put remuneration committee reports to a shareholder vote. About 120 responses have so far been received, but most have been non-committal, saying they will act if the Government forces them to, or act if most of their peer group move in this direction. The National Association of Pension Funds, which is backing the move, is to meet next week to decide its next step.

The push for an annual vote on pay is intended to avoid the need for legislation. On 7 March Stephen Byers, then secretary of state for trade and industry, raised the possibility of secondary legislation to enforce an annual vote on pay. The Government will take a final decision in the light of the Company Law Review's wider recommendations on company law reform. The results of that review are due in the next few months.

According to remuneration specialists, a handful of companies give the rest a bad name. Simon Patterson of SCA, says: "There are best-practice companies and there are rogue ones, but the UK has more performance-based schemes than many other countries."

Another point is that the UK is still well behind the US on pay for directors. SCA says the total average pay to a UK director last year was £900,000, including salary, bonuses and long-term schemes. This compared with £3.8m in the US for companies with a market value of more than $1bn. Though salaries between the two countries are comparable, US directors received twice the level of bonuses and four times the value of UK long-term incentive share option packages. These figures might make UK directors' eyes water, but such rewards are not likely to be sanctioned here.

One corporate governance specialist says share option package changes such as that being attempted by Marconi would increase the pressure for the cost of option schemes to be recorded in the profit and loss account. That would increase transparency and reveal the true cost to shareholders. The fat cats then might appear even fatter than they do already.