Investment giant turns on 'rewards for failure'

2005

UK fund management group Foreign & Colonial wants directors to be forced to pay back bonuses if it is later proved that their company had not been performing as well as it appeared.

According to a story in today's Guardian, Foreign & Colonial are targeting payouts made to executives of the Jarvis group, six of whose directors shared a payout of £807,000 despite the firm's share price having crashed from 566p to 9.5p, and Shell.

Karina Litvack, Foreign & Colonial's head of corporate governance, said: "We feel very strongly that this needs to be looked at. Shareholders should be protected against incompetence or lies." The Jarvis payouts were unacceptable, she said. "Something went horribly wrong and someone should have to take responsibility." Ms Litvack also suggested that directors had a moral responsibility to hand back cash they had not earned. "How can they accept the money?" she asked.

Foreign & Colonial also singled out Sir Phil Watts at Shell, who was ousted in March with more than £1m to cover his monthly salary to June 2005. "His bonuses were paid on the basis of [oil] reserves that were not there," Ms Litvack said.

. . . . Foreign & Colonial said a firm's remuneration committee "should maintain authority to withhold or reclaim all or part of non-base pay, including cash bonuses, options and stock awards, from executives" where appropriate.

Looking more closely at executive pay, it seems as if Foreign & Colonial have hit the spot with their focus on bonus payments. According to an analysis published earlier this month by pay consultancy Independent Remuneration Solutions (IRS), the basic average CEO salary of £968,000 adds up to an average of only 16 per cent of their total pay.

The plethora of additional benefits raises their average total remuneration package to £5.9m, IRS found.

And as another pay consultancy, Halliwell, has pointed out, the idea that these bonuses are linked to performance is "nonsense" because most are paid irrespective of whether firms meet their profit growth targets.

Yet another analysis has even shown that there is an inverse relationship between pay and profitability – the more the boss gets paid, the worse the company tends to perform.

While this type of pressure from institutional investors will undoubtedly begin to have an effect on executive pay in Britain, it may take rather longer to make itself felt across the Atlantic – where the CEO of Siebel Systems has received a $4.5m (£2.5m) severance package after less than a year in the job.

The Guardian | Crackdown on 'failure payouts'