THE HUMAN FACTOR

THE HUMAN FACTOR - There may be some kudos to be had from being the best-paid executive, but to be the one who benefits most from failure is surely not to be boasted about.

by Patience Wheatcroft, business and City editor of The Times
Last Updated: 31 Aug 2010

There may be some kudos to be had from being the best-paid executive, but to be the one who benefits most from failure is surely not to be boasted about.

When Sir Christopher Gent used his last annual meeting at Vodafone to criticise Jean-Pierre Garnier's now infamous contract, there were rumblings about pots and kettles. Gent certainly leaves Vodafone a very wealthy man, and the Conservative Party will be hoping that his new career will involve spending a big slice of his fortune on bettering its own fortunes.

But although many had been unhappy about the bonus Gent collected for completing the acquisition of Mannesmann, it was not a payment for failure. What is extraordinary about the GlaxoSmithKline affair is that the company had failed to understand the changed climate. Given the importance for a pharmaceutical company of dealing with governments and regulatory authorities and correctly gauging evolving public opinion, this should be giving investors even more concern than the potential cost of the golden parachute at the centre of the row.

How will GSK now be viewed when it has to negotiate on drugs prices with governments aware that generic versions of their products can be purchased at a fraction of the cost from India? The claim that drugs giants need high prices on their patented products to fund costly research is true, but governments will not fund multi-million dollar safety nets for failing executives.

Despite the militant mood of investors, Garnier insisted that he wouldn't vary the terms of a contract that could soften the blow of enforced departure from GSK to the tune of at least dollars 15 million. He continued to argue even after shareholders had voted against the package.

Even in the post-Enron world, there may be some kudos to be had in some circles from being the highest paid executive, but to be the one who stands to benefit most from failure is surely not to be boasted about.

GSK argued that Garnier's contract was not unusual by US standards and that the company has to take note of US norms. Although it maintains its primary stock exchange listing in London, GSK's culture has become increasingly American. Glaxo Wellcome retained a Britishness despite its international reach, but by the time of the merger negotiations, SmithKline Beecham was at heart a US business, headed by US-based Swede Jan Leschly.

Now, with half its operations in the US and the CEO a Philadelphia-based Frenchman, the merged GSK is more American than British, and Paul Allaire is the long-serving head of the remuneration committee. He was chairman of Xerox when its accounts misled people about the small matter of dollars 2 billion, landing it with a dollars 10 million fine for accounting irregularities from the SEC - a different sort of payment for failure.

Allaire may not be the best person to help GSK keep in touch with best practice in US boardrooms. The new mood of hostility to excess among British investors is also now apparent in the US. One can see why. After revelations such as Dennis Kozlowski's belief that Tyco should provide him with a dollars 6,000 shower curtain and Jack Welch's determination that even after he quit as CEO of General Electric, it should provide him with the best seats at ball games and enough fresh flowers to fill a florist's, there was bound to be a backlash.

So investors are now querying such deals as Garnier's severance terms as vigorously in the US as they are in the UK. The US trade unions are now trying to rein back executive remuneration packages that have escalated far faster than those for the shopfloor. Yet even though its investors had tried to spell out the implications, the pharmaceuticals giant was failing to read the signals.

Investors on both sides of the Atlantic are still willing to reward executive success, although the scale of the generosity will be more closely scrutinised. But when we are supposed to have flexible labour markets, a two-year, or even three-year, contract for the chief executive provides unseemly protection against poor performance.

Why would a self-respecting boss want to ensure that he can claim a hefty bonus if he is dismissed? It's hardly a demonstration of confidence. It may be that a CEO fears being vulnerable in the case of a hostile takeover. But a year's salary should be adequate compensation, and capable CEOs don't stay unemployed for long. If a dollars 15 million pay-off were the reward for succumbing to a hostile bid, some shareholders might feel that a chief executive might not want to fight on their behalf. Quite rightly, executives at Kingfisher have cut their two-year contracts to one. 'My severance package is bigger than yours' indicates not so much machismo as cowardice.

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