It's All in the (Copper-Bottomed) Contract

Article excerpt

Fat cats like Dick Grasso have given big money a bad name - yet we all want more of it. Check the small print and you just might get it, advises Andrew Saunders.

JK Galbraith, the Canadian economist and self-styled scourge of corporate America, once noted that 'The salary of the chief executive of a large corporation is rarely a market reward for performance. It is frequently more in the way of a warm personal gesture from that individual to himself.'

That was more than 25 years ago. But despite the inclemency of the economic climate and increasingly strict rules on the disclosure of (and hence the need to justify) senior executive pay, there have been plenty of cases in more recent times where this harsh maxim still resonates.

If you take 'salary' to include the exotic cocktail of benefits, bonuses, incentives and pension contributions without which any self-respecting captain of industry will not get out of bed these days, then shareholders of many of our top companies might recognise the spirit of Galbraith's edict even today.

JP Garnier at GlaxoSmithKline and William Aldinger at HSBC both had a hard time persuading investors earlier this year that they really deserved the kind of contract package they were proposing to award themselves.

Not to mention the fringe benefits - in Garnier's case a massive pounds 22 million pay-off in the event of his unscheduled departure, plus a pension that overstated his age by three years.

Aldinger was effectively paid dollars 20 million for keeping his job, receiving that sum as a termination fee following HSBC's acquisition of his former employer, Household International. He was then reappointed to head the merged group on the same deal, which includes the now-famous 'golden teeth' lifetime dental plan for both him and his wife.

When pension values are shrinking and belts being tightened across the land, it's hardly any wonder that the boss's take-home pay becomes a subject of great interest.

But in the heat of this debate, it's easy to forget that all these deals are just that - deals. They have been negotiated and someone (or more likely a group of people) has agreed that the terms and conditions are reasonable. The stakes may be higher and the ceremony more elaborate on the very top rung of the corporate ladder, but an employee is still an employee and a job contract still a job contract. 'What's in them will differ from firm to firm, but right up to a very senior level, many companies still have a standard form of contract,' says Stefan Martin, employment partner at Allen & Overy. And what's in those contracts is the starting point for every new hire, from graduate trainee all the way up to the chairman and chief executive.

So, if the process is not divorced from the way that mere mortals a few rungs down are hired and rewarded, why are the outcomes so different?

How did Tomkins' Greg Hutchings manage to square his extravagant ways - at one time he famously had not one corporate jet on standby but a fleet of them, and both his wife and housekeeper on the company payroll - with the fact that the business was going to the dogs at the time? How did NYSE chairman Richard Grasso manage to collect dollars 140 million - a sum so large that one fellow board member thought it was a typing error - from his employer before his forced resignation in September?

Even those with a stellar record and cast-iron reputation for ruthlessness seem to develop a warm Galbraithian glow when it comes to the small print of their own terms and conditions. 'Neutron' Jack Welch, for 20 years the US corporate hero sans pareil, was so badly pilloried for the lavish retirement deal he brokered on leaving GE that in 2002, following interest from the US Securities and Exchange Commission, he started paying GE about dollars 2.5 million annually for a severely reduced version of it. The full story emerged during his divorce from Jane last year. …