They have cast aside their share options but have opted instead for long-term incentive plans with such undemanding criteria that they stand to become much, much richer.
BRITAIN'S fat cats are about to get a lot fatter. They have cast aside their share options but have opted instead for long-term incentive plans with such undemanding criteria that they stand to become much, much richer.
The trend marks the failure of the government's attempts to thwart the worst cases of financial obesity. Now the City's major shareholders are warning privately about the danger that these new rewards will go to those who fail as well as the successful.
A year ago, when front page headlines screamed the latest million-pound packages of many of the utility chiefs, the chairman of Marks and Spencer, Sir Richard Greenbury, was given the job of attempting to impose curbs.
He concluded that full and detailed disclosure would embarrass executives into taking pay cuts. He underestimated their shamelessness.
Some of the pay consultants responsible for drawing up these new awards blame Greenbury's hasty recommendations for the state of corporate pay today.
Peter Brown, chairman of the Top Pay Research Group, says: "The effect of Greenbury has been inflationary because he insisted on the use of comparator studies."
Mr Brown, whose clients have included National Power, Hyder and the National Grid, explains that no company wants to pay below the median, so the average figure spirals up inexorably.
This week shareholders in South West Water discovered it had bid farewell to its managing director, Bill Fraser, with a pay and compensation package worth almost £900,000. Thames Water, which parted company with its chief executive Mike Hoffman this spring, sent him away with £384,000 in compensation on top of last year's £338,000 pay and pension package and £216,000 in pension provisions.
Companies that aren't paying executives to go are paying them to join. British Gas offered David Varney from Shell a £100,000 "golden hello" on top of his £385,000 salary to head its TransCo pipeline arm.
The Greenbury committee said a number of remuneration committees in the privatised water and energy sectors "have developed, perhaps unintentionally, remuneration packages which are richer than required to recruit, retain and motivate quality managers".
It called for an urgent review, but this has failed to reduce executive packages.
Sir Desmond Pitcher, with £360,000 in pay and pensions, was the highest paid director in the water industry in 1995 as chairman of North West Water, now United Utilities.
His remuneration committee reported last week, however, that their review had concluded that directors' pay in the group "has been wholly consistent with the company's objectives and relevant market practices".
This defence of the company's past policy accompanied news of "special bonuses" between £18,700 and £48,000 for "the exceptional burden" borne by three executives during the takeover of Norweb.
Such reviews have not led to lower packages. Instead they have spawned a flurry of even more generous bonus schemes. Share options are no longer the route to riches they once were for utility executives because the shares of electricity and water companies have under-performed, so they will not be much missed.
United Utilities leads the way again with one of the new long-term incentive plans, or L-Tips. Others have come from Hyder, Inchcape and P&O. Institutions say Guinness got it right when it accidentally described its new bonus scheme as the "long-term inventive plan".
The need to shake up companies' pay policies has produced a flood of work for remuneration consultants such as Towers Perrin, the Top Pay Research Group and Arthur Andersen. The pay practitioners have justified their fees by producing ever more convoluted variations on the L-Tip theme.
"Share options were at least nice and simple, but these things are so complicated," the corporate governance manager of one large institutional shareholder complains. "There are so many layers to these rewards it's mind-blowing."
Peter Brown adds that Greenbury's insistence that remuneration committees should provide more detailed explanations has meant private shareholders find it harder to see the wood for the trees.
"Somebody like myself loves it because this is my game," Mr Brown says. "But a lot of small shareholders are confused."
Ten days ago the accountants Ernst & Young published a study on the effects of Greenbury, asking: "Have we got it right yet?" Their answer was "No", or at best a heavily qualified "Maybe".
They, too, concluded that the increase in disclosure seen in the past year "has, ironically, become a barrier to effective communication" and pointed out that the blossoming of long-term bonus plans "has not been matched by a reduction in annual schemes".
A fund manager for another leading pension fund, who also asked not to be named, adds: "Often these incentive plans come with not only a reasonable or good basic salary but also a cash bonus and all sorts of other bells and whistles."
She cautions: "There is a danger that we are entering a new phase of escalation through the L-Tips that are being introduced at the moment. There are an awful lot of schemes which start paying out for below-average performance."
The Boots scheme, for example, offers a 25pc bonus if the company comes only eighth out of a peer group of 11. For chairman Lord Blyth this would mean £117,500 on top of his £470,000 basic salary.
Rewards from L-Tips should be subject to challenging criteria, Greenbury said, and their potential rewards should not be excessive-although the report gave no definition of excess.
Bonuses, it added, "should not be allowed to become, in effect, another guaranteed element of remuneration".
The new schemes are, unlike share options, almost all subject to performance measurements, but in practice those criteria are sometimes less than challenging.
Prudential, Guinness and Inchcape have all instituted schemes which can pay out even if their share price performance is below the average of a peer group selected by the remuneration committee.
Mr Brown adds that, as many companies have very few genuine comparators, measuring their performance against a loosely picked peer group or an index of similarly sized companies can be misleading. If the peer group performs badly, directors may still collect rewards even if their share price has gone down.
The frameworks of these schemes must all be put to the vote at annual meetings, but shareholders are not asked to vote on the scale of the rewards under them.
The number of shares, or the amount of cash, allocated to each director under the scheme is decided privately by the remuneration committee and reported only after the event.
L-Tips have faced only ineffective criticism from a small clutch of institutions. Apart from Standard Life and Pirc, the sometimes controversial corporate governance consultancy which advises a growing number of local authority pension funds, few have been prepared to make a public fuss.
One institution that has been lobbying behind the scenes on the subject, but which again would not speak publicly, said: "We have not had an awful lot of success because there is no consensus on our side of the fence."
Some institutions fear that the Prudential's decision to opt for a long-term bonus plan could place Britain's largest shareholder in a difficult position should it choose to oppose such schemes elsewhere.
If the institutions find it hard to speak with one voice, private investors with their limited resources have no chance.
If any of them wanted to attend the annual meetings of National Grid, National Power, United Utilities, Hyder, East Midlands Electricity and Southern Electric they would have to be in six different places on the morning of July 26.
As for the Greenbury report's author, Sir Richard's spokeswoman said yesterday: "It is something he really feels is done now. I am not aware he feels he wants to bring it up again."
