Commentary: Europe: Shine A Light On Executive Pay

In the U.S., insurer Conseco Inc. paid its new boss, Gary C. Wendt, $45 million just to show up. If he hangs in there for an additional two years, he'll pocket as much as $50 million in stock. Make that seven years, and Wendt gets an annual lifetime annuity of $1.5 million.

Wendt sure wouldn't want to get hired on the other side of the pond. In Britain, shareholders are outraged over the bonuses recently given to the CEOs of two of the country's leading companies. Jean-Pierre Garnier, the new head of the world's biggest drug company, GlaxoSmithKline PLC, was awarded options worth $24.7 million, or 20 times his salary. And Chris Gent, CEO of Vodafone AirTouch PLC, the world's leading mobile-phone company, got a bonus of $15 million in cash and stock.

These sky-high salaries are getting all the headlines in Britain--and the most stinging criticism. But European shareholders would be better off if they focused their ire on the real problem: lack of transparency. Both Gent and Garnier helped build their companies into world-class players. They deserve to be well compensated. But if the two executives want U.S.-style salaries, they should be subjected to U.S.-style disclosure rules. Shareholders deserve to know whether a CEO's compensation is linked to corporate performance. And they should be told clearly how that performance will be measured.

TARGET PRACTICE. Vodafone, in particular, has been vague on details. Its new compensation policy, which was approved at the July 27 annual shareholders meeting, requires few specific links between pay and performance. For instance, the company says top managers will have their compensation benchmarked against a global peer group. Problem is, Vodafone neglects to mention the identity of the peers or the target levels. In the future, Vodafone promises shareholders that only 25% of salary will be in cash and the rest will be in stock awards based on "very stretching" performance targets. Great--but the actual targets remain undisclosed.

Then there's the lurking suspicion among some shareholders that the Vodafone pay schemes are designed to reward Gent and his top execs for pulling off the Mannesmann acquisition. "This rewards size for its own sake and could encourage overpayment for acquisitions," says Stuart Bell, research director of London-based corporate governance consultancy Pensions & Investment Research Consultants Ltd. Bell says a company should always peg bonuses to a company's stock and profit performance, not its deals. Vodafone says the Mannesmann deal did not figure in Gent's bonus or anyone else's. With Vodafone's performance targets so vague, however, it's hard to tell just what Gent and his lieutenants are being rewarded for.

RILED UP. Glaxo's plan is more palatable to shareholders. Garnier's bonus stock options are only worth something if the company's share price improves. Still, the performance targets laid out to shareholders are relatively weak. They are based on the assumption of 3% annual earnings growth--close to the rate projected for overall economic growth in Britain.

At least investors have gotten properly riled up. After a barrage of negative publicity, Vodafone has bowed to pressure from institutional shareholders to make things a little less sumptuous. On July 27, Gent announced that he would use part of his cash bonus to increase his personal stake in the company to 2 million shares, to be held for three years. So his fortunes are now more clearly tied to the stock's performance.

That's a step in the right direction. But until Vodafone provides a clear definition of the links between management pay and corporate performance, its shareholders will have no definitive way of knowing whether Gent and his team continue to be worth their price. Vodafone investors deserve to know the details: After all, Gent is working for them, isn't he?

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