Stop this US pay excess

By ALEX BRUMMER, CITY EDITOR
Updated:

 

TOMKINS chairman David Newlands should know better. As a former finance director of GEC, under Lord Weinstock's stewardship, he ought to be an expert on frugal management.

Moreover, having rumbled the excesses of the last chief executive of Tomkins, Greg Hutchings, one might have thought he would be at pains to ensure that the remuneration package of his successor - after an 18-month search - would not cause embarrassment.

The reverse is the case. By handing over the search for a new chief executive to international headhunters, Newlands and the Tomkins pay committee are importing to Britain an American-style package, which is certain to contribute to the game of pay leapfrog becoming rampant in our boardrooms.

Tomkins argues that, with much of its business now in the US, it makes sense to choose a North American chief executive in the shape of Jim Nicol, who comes from the car components industry. Be that as it may, it seems extraordinary-that it takes a pay and options package worth a potential £30m to bring him here. This is nearly three-times what BT will be paying its new Dutch chief executive, Ben Verwaayen, to head a far more complex company.

Nicol, who emerged from a shortlist of three, does not have to worry too much about Tomkins going wrong. If he fails to deliver on shareholder value in his first 18 months in office, he can look forward to two years' payment for failure. This flies in the face of everything for which shareholder activists have been striving.

More seriously, boards, frustrated by their inability to find qualified managers at home, are increasingly looking abroad.

There is nothing wrong with that in a globalised economy. But, in turning to the US, where corporate remuneration has lost all touch with reality (as seen at Enron), British companies are setting a terrible precedent. It will not be long before every major company chief executive is demanding parity.

All this will do is to increase the ever-widening gap between pay in the boardroom and those below. Newlands is doing no one any favours by tossing shareholders' money around like confetti.

Marks retreat
THE stampede away from defined benefit pension schemes gathers pace. Marks & Spencer, which, for decades, prided itself on offering staff a superior package of benefits, will join the escapees on April

Benefits of the 60,000 M&S staff and executives in the non-contributory scheme will be unaffected, but new joiners at all levels of the company can wave goodbye to comfortable retirement arrangements. Under the present scheme, M&S stumps up all 16% of the pension scheme. As in the case of other companies moving towards money purchase, it is likely to cut its bill and shift more of the responsibility for funding pensions to the workforce itself.

In some respects, this is understandable. Pensions presently constitute 20% of payroll costs. As of April 2001, the pension fund was £134m in deficit and there has been a further deterioration since. The main factors behind the deficit are the poor performance of the stock market, over the last couple of years, and the 1997 decision by Gordon Brown to remove the tax relief provided to pension funds on dividends.

Finance directors of several FTSE companies have told me that the impact of the tax change has been far greater than estimated at the time, when the Treasury argued that the shortfall would easily be covered by the existing surpluses in pension funds.

What the Treasury and its tax experts failed or chose not to comprehend is that the loss of the tax benefit, compounded now over several years, has left a gaping actuarial hole.

In principle, there is nothing wrong with money purchase schemes if companies and employees continue to put in the same amount of cash. But that does not happen.

In most cases, it is simply an excuse for firms to lower costs, and employees seldom have enough financial resources to make up the difference from their own pocket.

The result is that we are in danger of creating a nation of pension paupers.

Eurosceptics argue that one of the best reasons for staying out of euroland was to avoid the British taxpayer having to pick up the bill for unfunded pensions.

At the rate that our pension funds are currently shrinking, Britain could soon find itself among the laggards.

Yet, so far, there is scant recognition in Whitehall as to the act of financial destruction in which the government has become involved.

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