Are CEOS tempted to cash in?

Joanne Hart12 April 2012

WHEN Stuart Rose became chief executive of Arcadia he was handed almost 6.5m stock options which would turn into cash as the shares hit 90p, 180p and 270p. At the time, the price was 51p and Rose had to stay at the company for four years before taking the money.

If Arcadia were taken over, however, Rose could almost certainly cash in immediately. The pay package was shown to investors, who suggested it would do little to discourage Rose from selling Arcadia if an approach materialised.

Less than a year later, the retail chain has indeed had a bid approach and Rose has yet to decide what to do about it. It is unclear whether the bidder, Icelandic group Baugur, is really serious and of course Rose insists he is committed to his job. Even so, he would receive more than £16m if the bid went ahead.

The situation highlights an area about which many institutions feel uneasy - change-of-control clauses. These tend to be inserted into executive contracts, explaining how their pay will be affected by a takeover or merger. Usually, they say any performance criteria on bonuses and option plans will be waived in the event of a change of control. In other words, executives cash in by selling the companies they manage.

The deferred nature of schemes tends also to be waived so even if a director is normally unable to touch bonus shares for several years after they have been awarded, a takeover or merger allows immediate access.

Change of control clauses can result in executives taking home millions of pounds by selling out, even when a deal has been triggered by underperformance. If they are re-employed by the enlarged new group, fresh options and bonus schemes are awarded.

Institutions believe a degree of moderation is needed to ensure shareholders' interests are aligned with those of management. If, for instance, a director is supposed to be unable to touch bonus shares for three years and a bid comes along after one, only a third of the stock should be made available. If performance targets have not been met, bonuses should be withheld or at least restricted.

Investors recognise that deals can lose executives their jobs so some compensation is due. But when the sums involved run into millions, there is often the suspicion of a conflict of interest.

Directors always stress that they have the interests of their company at heart. But it is sometimes hard for shareholders to be sure.

RESTRICTED CODE

THE Competition Commission spent 15 months and £3.75m checking if supermarkets were ripping off their customers. It concluded they were not but suggested a code of practice be drawn up to improve relations with suppliers. That was 13 months ago and this week the code finally saw the light of day. It applies only to Asda, Safeway, Sainsbury and Tesco and principally says suppliers should be paid promptly and not asked to discount prices without proper notice. The supermarkets accepted the code and suppliers dismissed it.

This is a difficult area for the Government. Its interest in the supermarkets began because it suspected they were overcharging. Any attempts to over-regulate the relationship between the retailers and the producers of food could end up increasing prices. On the other hand, suppliers, particularly farmers, have an emotive role in our society. The Code of Practice has skated over these knotty problems.

The least the Department of Trade could have done was insist it be applied to every supermarket chain. The smaller groups are not known for their kindliness towards food producers.

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