Fat Cat Fur Is Flying

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When Jean-Pierre Garnier's proposed $36 million severance package got slapped down by angry GlaxoSmithKline shareholders two weeks ago, it looked as if the U.K's revolt against fat-cat compensation — the movement against oversize salaries and bonuses for CEOs, especially those in charge of underperforming companies — might actually have some teeth. The stage seemed set for a major showdown at the annual shareholder meeting of banking giant HSBC last Friday. A new American board member, William F. Aldinger III, was up for an eye-popping three-year, $37.5 million financial package, and shareholders would get a chance to vote on it.

First, they got a chance to sound off. "This American-style remuneration has no place in this country, and if you don't revise this package you will have set a very dangerous precedent," shareholder Victor Silk told HSBC chairman John Bond. But in the end, Aldinger carried off his saucer of cream with relative ease. Bond's argument that Aldinger would be getting slightly less than his previous pay package was grudgingly accepted by the majority of shareholders, and institutional investors voted heavily in his favor. And so Aldinger, who now ranks among the highest-paid executives in Britain, will take home $3 million in salary, $12 million in guaranteed annual bonuses, and $21 million in stock grants over three years, plus other lavish benefits on top of the $20.3 million paid him by HSBC for having his contract terminated with Household International, a firm HSBC recently acquired.

But at least HSBC has outperformed the market. It's the idea of "rewards for failure" that has really fueled the fat-cat fuss in Britain. Just as in the U.S., where revelations of corporate piggery last year triggered a populist backlash, Britain's shareholders are asking why they should subsidize the opposite of success. Says Tory M.P. Archie Norman, former chairman of the ASDA supermarket chain, "When time after time, directors walk off with wheelbarrowloads of cash after presiding over declining share prices while shareholders get nothing and employees are made redundant, there is the perception of one rule for the privileged few — who get paid a lot anyway — and another for everyone else."

Although boardroom pay has been rising for years, British legislation introduced last year requires public companies to provide remuneration details for annual approval by shareholders. The votes are not binding, but the investors' disapproval can prove embarrassing. Three tough stock- market years, plunging pensions and job cuts everywhere have sharpened attitudes toward corporate excesses, even in the traditionally passive British shareholder culture. One Barclays bank investor made news by telling chief executive Matthew Barrett at the recent shareholder meeting that with a pay package of $2.6 million, he was getting the "equivalent to 10 High Court judges." Robert Smith, a quiet-spoken retired structural engineer, also sharply questioned banking group Abbey National's board. Abbey last year lost $1.6 billion, halved dividends but paid golden handshakes totaling some $9 million to five departing directors. "It's scandalous," Smith says. "It was a reward for failure."

The furor is largely a British phenomenon. On the Continent, pay and compensation packages tend to be lower and not subject to the same public scrutiny. German companies don't even need to publish details of executive remuneration, although pressure is growing on firms to do so. In France, a law passed in 2001 requires disclosure of top people's pay and severance packages at listed companies, but so far it has disclosed only a few cases of high pay for poor performance.

Can legislation put the fat cats on a diet? Recent British shareholder activism has encouraged Trade and Industry Secretary Patricia Hewitt to prepare a paper looking at excessive board-room remuneration awards, but its ultimate recommendations remain uncertain. And in the end clever executives and accountants could find ways to circumvent legislation. It's up to shareholders to hold the cats' paws to the fire.