`Golden Handshakes' Stir Up Controversy

British Board of Trade says severance pay is excessive

HUGE ``golden handshake'' payoffs to top British business executives have come under attack from Michael Heseltine, president of Britain's Board of Trade.

The issue of how much executives should receive when they quit their companies has been forced onto Mr. Heseltine's agenda by a series of high-profile cases receiving news media attention at a time when Prime Minister John Major is battling to hold down wages and salaries and, thus, keep inflation below 3 percent.

In mid-August, the outgoing chairman of an electricity company received a 1 million British pounds ($1.56 million) retirement package.

The next day, a Sunday newspaper revealed that Peter Davis, retiring co-chairman of Reed Elsevier, the Anglo-Dutch publishing company, was getting a ``golden goodbye'' worth twice that amount.

This gave the opposition Labour Party its cue to spotlight a string of recent cases in which senior executives who quit their jobs at companies left on terms that made them overnight millionaires.

High-flying payoffs

PIRC, a research company that analyzes executive pay, calculates that this year, Britain's top 250 companies have paid a total of 25 million British pounds to former executives. The highest payoff was 3.1 million British pounds to John Cahill, who gave up the chairmanship of British Aerospace in February.

Robin Cook, Heseltine's Labour Party ``shadow'' in the House of Commons, says such payments constitute ``a gravy train out of control.'' Heseltine says the ``time seems to have arrived'' for shareholders to ``rein in huge payoffs for departing company directors.''

The government is coming under pressure on the payoff issue soon after the escalating salaries of privatized industry chiefs became a focus of sharp debate.

This month, the official water regulatory body criticized salaries paid to executives of water companies that were sold to the private sector five years ago. Since 1990, the average annual salaries of water-industry chairmen have risen from 50,000 to British pounds 200,000 British pounds. Comparable increases have occurred in electricity, steel, and other privatized industries.

Over the same period, Conservative governments under Margaret Thatcher and John Major have made curbing inflation a central policy plank. Currently, Britain's rail industry is suffering from strikes called by signalmen who are being asked to accept a pay rise of less than 3 percent.

Public pressure on companies

The public outcry over golden handshakes seems likely to pressure companies to think twice before ordering massive package payments to departing chairmen, executives, and directors. Michael Harvey, senior fund manager at Royal Insurance, says the days of large windfall payments to top executives are nearly over. But how Heseltine will go about curbing payments is a matter of argument.

Many company executives are hired on employment contracts with no fixed term but rather with a notice period of two or three years. Mr. Harvey notes that if a company wants to drop a director who is on one of these so-called rolling contracts, the company will have to contemplate making a large severance payment.

The case of Peter Davis illustrates the difficulty. Mr. Davis was a highly successful chairman with a yearly salary of 456,000. His British pounds retirement package reflects his steep salary and also includes share options and an enhanced pension.

Peter Brown, chairman of the Top Pay Research Group, says chief executives are often generous to more-junior colleagues leaving their company because they hope that, when they themselves quit, the firm will be generous to them too.

Heseltine's officials say the best way to apply pressure to boards that habitually approve seven-figure payoffs is to encourage institutional investors who hold the equity in companies to demand tighter discipline. This approach appeals to many Conservatives, who say the play of market forces - not intervention by governments - should determine commercial policy.

Ross Goobey, chief executive of PosTel, the Post Office and British Telecom pension fund that has about 25 billion British pounds in funds under management and owns about 2 percent of British industry, says he wants three-year rolling contracts for directors to end. He says he would like to see other institutional investors take a similar line.

Ironically, the debate over golden handshakes and shooting-star salaries is gathering strength as members of Parliament come under attack for voting themselves a pay raise that is twice the rate of inflation. Starting Jan. 1, members of Parliament will get an extra 4.7 percent, increasing their basic pay to 33,169 a British pounds year.

Jimmy Knapp, leader of the striking railway signal workers, says his men would react to the MPs' pay hike ``with a mixture of anger and cynicism.''