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Fat Cats: The Undeserving Rich?
A survey for the business magazine, 'Management Today', in August 2001, reported the following 'facts' about executive pay in the UK and the US:
- Britain has the highest paid accountants, earning on average £ 76 288 a year.
- City-based fund management directors average nearly £ 145 000.
- Chief Executives receive on average £ 197 590.
- In the US, the average CEO gets close to £ 1 million a year.
But the headline figures hide a wealth of detailed information, not just about the levels of pay, but also about remuneration methods at the top of the earnings ladder.
An alternative survey on executive pay, carried out for The Guardian by Inbucon is based on information in the latest annual reports of FTSE 100 companies in the middle of June 2001. Some of the more interesting findings were as follows:
- Two 'new economy' companies dominate the survey of boardroom wealth.
- Five of the top ten highest paid executives come from these two firms.
- Computer services outfit Logica and microchip designers ARM Holdings dominate.
- Logica chief executive, Martin Read, landed more than £27 million pay in 2000.
- ARM boss, Robin Saxby's pay packet for the year totalled over £22 million.
But the key reason for these staggering pay levels appears to be that these chief executives exercised share options that had built up over recent years. For example, Read earned over £17 million from selling his Logica shares; Saxby's shares were cashed in for £21.8 million.
In addition, the Logica chief was awarded £8 million from the firm's long-term incentive plan. This means that the part of his earnings derived from salary and other bonuses, worked out at over £2 million. Meanwhile, the ARM chief had to make do with a meagre (in City terms) salary of £223 250, plus a bonus of £105 750.
Share options are awarded to encourage loyalty and at ARM that extends to other staff than just top management. Having started business in 1990, the firm now employs over 500 staff who have been rewarded handsomely for hitting sales growth targets. 150 other ARM staff are now millionaires, having exercised their share options.
In cases like this, where the wealth generated in a firm by the efforts of its staff, is shared, it is harder to be cynical about the timing of share option sell-offs. But, to the casual observer, it may seem highly fortuitous that these shares were sold at such rewarding price levels, during a year when the value of the company shares has since fallen to only a third of the peak price in 2000.
Contrast this, though, to these two examples of fat cat-ism in the US: Michael Eisner from Disney Corporation (aka 'the fat cat who runs the mouse factory') and Steve Jobs of Apple Computers. Management Today reports that Eisner, earned £134 million plus bonus (amount not reported) in 2000. In the same period, Jobs was rewarded with £264 million plus £604 million in share options.
Getting dizzy looking at the figures? That's understandable, but we have to evaluate headlines such as 'Company bosses' pay rises by average 16.7% last year'. We may think of massive pay rises such as the average 37% rise given to the top quarter of UK chief executives as an injustice, especially when many of the firms they work for are now making large redundancies. But we still need to investigate what the data are telling us.
For instance the calculations of total pay in the Guardian-Inbucon survey, include base salary, termination payments, annual bonuses, deferred bonus schemes in cash or shares, the release of long-term incentive plans and gains on any options that were exercised during the period studied.
Hidden in the midst of all this information are insights into executive pay that help us to understand the issue more thoroughly.
There may be more than one way to skin a cat, but there seem to be far more ways to feed it up.
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The future's bright, the future's been leaked by Orange
The release of company results' data usually follows a predictable path: the markets set their expectations of a company's performance, often with the firm's help in preparing the analysts' minds for good or bad news; the results are reported and the financial analysts, traders and investors react by selling or buying the company's shares; the impact of the market's reaction is seen in the firm's share price, which rises or falls on the news.
But when France Telecom, owner of the mobile phone and internet companies Orange and Wanadoo, released its first-half results on Wednesday 30th August 2001, it was a little ahead of the game - one week ahead, in fact. By Wednesday evening, the firm sent an e-mail to analysts asking them to ignore the "confidential information" that had been sent out by mistake.
Unfortunately, financial and telecoms analysts had already started to react to the news, which indicated a far better performance than the markets expected. The cat was well and truly out of the bag, as it were, and warning bells began to sound about how the financial regulators would view the 'computer error in the Orange press office', as it was put.
With shares in Orange climbing rapidly during Thursday morning trading, France Telecom was forced to confirm the preliminary data. This showed that rather than the expected 60 % rise in profits, Orange had in fact recorded a profits increase of over 100 %, with much stronger cash flow than predicted. This took place against the back-drop of telecoms firms' profits warnings and job cutbacks.
Full results for France Telecom were to be published on 5th and 6th September, as originally intended. But, investors who reacted quickly to the leak and saw Orange's share value rise by 8 % during Thursday, are likely to be far happier than those who remained in the dark.
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