The human factor

The human factor - So endemic has the pay-off concept become that investors are accustomed to paying large sums to executives who leave because they fancy a change.

by PATIENCE WHEATCROFT, business and City editor of The Times
Last Updated: 31 Aug 2010

So endemic has the pay-off concept become that investors are accustomed to paying large sums to executives who leave because they fancy a change.

A terrible coyness surrounds most executive departures. The chances of anyone in corporate life doing 'an Estelle' are about as likely as the prospect of the former minister being invited to lead an expedition to the north pole.

Executives go quietly, clutching as much money as they and the company deem necessary to ease the process. No matter how dire their performance or how fraught the boardroom rows, shareholders are supposed to accept the bland explanation that the personnel change is entirely amicable and no reflection of problems within the organisation.

Hence Sir Patrick Gillam remained seemingly unaware of the crescendo of City voices calling for the head of his chief executive at Royal & Sun Alliance when he announced the departure of Bob Mendelsohn in September. The shares had lost three-quarters of their value since the start of the year and investors refused to support a cash-raising issue without change at the top, since they'd lost all confidence in Mendelsohn's ability to steer R&SA through its troubles.

Yet Gillam said the affable American had 'set a firm strategic direction' for the group. 'In order to exploit the work done to date, it is the board's view that the best interests of the group will be best served by a change in the top management.' And since it is merely the whim of the board deciding that it's time for a change, there has to be payment of one year's notice period.

Since it is the chairman's role to ensure that a business has the right chief executive, there may be a certain reluctance to admit to having chosen someone inadequate. But a consequence of this no-fault approach is that boards hand over a farewell cheque as a reward for a job not well done. Mendelsohn, generously rewarded during his time at R&SA, collected more than #1 million for going.

At Abbey National, the man who let the wholesale banking business become dangerously attached to high-risk bonds was sent packing when the risks involved became clear. But the risks had been more for Abbey shareholders than Gareth Jones, who took #1 million with him. So it was only fair that when his boss Ian Harley was ousted as CEO at Abbey this summer, he also collected about #1 million.

So endemic has the pay-off concept become that investors are now accustomed to paying large sums to executives who say they are going because they fancy a change. This is clearly nonsense. If someone who is doing a good job and is valued by his board decides he would rather opt out and live in a commune or sail round the world, his decision has to be respected. But it doesn't have to be rewarded with a year's cash.

Yet in October, Sir Peter Vardy was bemoaning the decision of his chief executive, Gerard Murray, to leave the Reg Vardy car dealership after only 18 months in the job. 'I wish I knew why he is going,' said Sir Peter. Could it have been that Vardy, who promptly resumed the CEO's role himself, did not excel at delegation? Murray was not saying, but Vardy, despite his apparent reluctance to see him go, handed over a cheque for #240,000, a year's salary, to the departing chief executive.

There was even more mystery over the departure of John Weston, who suddenly ceased to be chief executive of BAE in March. The explanation was that, on hitting 50, he felt the need to do something else. Kindly BAE softened this mid-life crisis with a payment of E600,000, leaving the City to speculate on the real story. At the firm's annual meeting, Sir Richard Evans was disinclined to elaborate. 'There is no story behind this. John resigned and that's it,' he declared.

After 30 years with the business, Weston may have felt ready to try something new. But if it was his choice to leave, why does the company have to honour the notice period in his contract? His long service puts him in a different league to most expensively ousted CEOs, but the traditional way for a firm to say thanks was a carriage clock.

Upbeat departures, with celebratory speeches, seem to have given way to hasty exits through the tradesmen's door, cheque in hand and lawyers at the ready. Sir Stanley Kalms did it differently, bowing out of Dixons recently with a glittering party at Claridges. His long-standing rival Sir Geoffrey Mulcahy had dreams of a similar celebration to mark his exit from Kingfisher next February after 20 years. But the past three years have not been glorious for the group and the new chairman, Francis Mackay, has bundled Sir Geoff off the premises already. Half a year's salary and a E 700,000 pension ensured speed and silence, but I suspect Mulcahy would have sacrificed some of the cash for a more dignified exit.

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