Magazine article Management Today

The Performance Pay Rate

Magazine article Management Today

The Performance Pay Rate

Article excerpt

Top UK executives still trail their US counterparts in the salary stakes, but they may soon sample some of the joys of rarefied American-style packages that rely heavily on long-term share incentives, particularly after mergers and acquisitions. Get ready for some astronomical figures, says David Smith

It all started, perhaps, with Richard Giordano, the American who used to run BOC. Like today's foreign football stars, Giordano did not come cheap. For years he topped the executive pay league, and by some distance, but the reasons were straightforward enough. Operating in the global management marketplace he could always take his talent elsewhere. As an American, he knew what the global marketplace paid.

While Giordano was the source of much envy, however, he did not produce a great deal of imitation. Even in the days of red-blooded Thatcherism a mood of caution prevailed. Business was emerging timidly from the dark days of the 1970s when private enterprise was seen as public enemy number one, and few people wanted to risk their head above the parapet for fear of reigniting old enmities. Margaret Thatcher herself, while chief torchbearer for the free market, appeared to find it morally repugnant when those who prospered in that market enjoyed what appeared to be 'excessive' rewards.

When Giordano took his salary philosophy to British Gas, the Tories were still in office, now under John Major, but this did not prevent Cedric Brown - the chief beneficiary of Giordano's philosophy - from facing one of the most vicious campaigns endured by a senior executive in recent years. That has now changed and few could have expected that a Labour government, elected partly in response to the sharp edges of Thatcherism, would not only embrace the free market but actually declare itself comfortable with sky-high levels of executive remuneration - as long as they are justified by performance.

Thus Stephen Byers, the trade and industry secretary, declared in July, 'We need to recognise that in a global economy, world-class performance must be rewarded with world-class pay.' As few companies would ever admit to not aspiring to be world class, Byers has effectively given the Government's blessing to what Labour used to attack as 'fat-cat' excesses. Like his predecessor, Peter Mandelson, Byers is impressed with the American experience using, among others Marjorie Scardino, the US-born chief executive of Pearson, as someone who deserves every penny. 'We accept such an approach in relation to sports stars, so why don't we adopt the same attitude for directors?'

Hot on the heels of Byers' comments came proof that to take advantage of this philosophy you don't have to be American like Giordano, Scardino or 'Lucky' Jim Fifield - who, although he did not make it to chief executive (and received a [pounds]12-million handshake, for his disappointment) topped the FTSE-100 league of directors' remuneration for running EMI's music division - when Martin Sorrell, chief executive of WPP, announced a five-year incentive plan for himself and fellow directors under which, subject to performance, they would receive [pounds]60 million in bonus shares, half of which would go to Sorrell. He insists the plan is, 'a truly entrepreneurial programme in that it is a risk-take', not least because he and his colleagues are committing [pounds]12-million of shares to the programme together with some of the shares they were awarded under the previous, and controversial, incentive scheme. For US investors, he says, it would hardly raise an eyebrow, so common are such programmes, it is only conservative UK institutional investors who get picky over such things.

The mood though is changing. Richard Regan, head of investments at the Association of British Insurers, has said: 'The scheme appears to be designed to meet the criterion recently agreed by the ABI and the National Association of Pension Funds (NAPF) which demands exceptional performance for exceptional rewards, and it is unlikely to be resisted by institutional shareholders. …

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