Two sets of numbers have bloated gigantically over recent years: the king's ransoms paid in mergers and acquisitions, and the golden fortunes in 'compensation' thrust into the palms of top managers, above all (naturally) chief executives. The two bloats are closely related - as Vodafone AirTouch's £10 million bonus for Chris Gent makes abundantly clear.
This whopping sum is reward for masterminding Vodafone's £100 billion battle to take over Mannesmann, thus consolidating the British company's loftiness in the world telecoms league. The naive observer might think that Gent, with a mean million in salary, is already handsomely paid for his strategic mastery. Why does he deserve £10 million extra for actually doing his job?
The less naive observer might note that relatively few mergers and acquisitions truly enrich shareholders, as many studies have established. Why is Gent receiving half his magnificent prize in cash before the Mannesmann merger has demonstrated whether it is the exception or the rule? The answers to the naive and the less naive questions are the same. Top management, aided and abetted by non-executive directors, can accumulate wealth, earned or unearned, with little let or hindrance.
By the same token, they can plunge into mega-mergers with fervour, backed by banks which are awash with capital. By a happy coincidence, the mega-mergers tend to boost the managerial moolah. A giant worth £200 billion should plainly pay its boss more than a mere £100 billion midget, shouldn't it? You can even justify this arithmetically. Willy-nilly, the CEO must submit to massive pay to leave enough room to reward and retain lower executive ranks. The more the ranks, naturally, the higher the ceiling.
If that's hard to swallow, consider the distressing case of Marconi. The remuneration committee is "aware that the company's current approach to share option grants is not sufficiently competitive to that provided by its US competitors which currently dominate the industries where the company operates". So Marconi is revising its scheme - which presumably means more goodies for chief executive Lord Simpson.
His four-year take has already passed £14 million. Onward and upward is the top pay motto as company after company, with no visible reluctance, engages in this lucrative game of leapfrog. It hinges on two unlikely propositions; first, that Gent, Simpson et al will scarper to other employment unless paid more; second, that their best efforts are only forthcoming because they get best pay. The second proposition is insulting as well as absurd, since it implies that the recipient is a mercenary with no vision beyond his own pay-packet.
Yet Jack Welch, the super-manager of General Electric, and already a stock option billionaire, was awarded an extra $42 million, conditional on his meeting the corporate targets in this, his final year. The idea of Welch, a far from extinct volcano, cooling off is laughable. Such payments have no rhyme and only one reason - to enrich the executive concerned out of the shareholders' pockets. So long as those pockets are enormously deep, nobody much cares.
There is specious logic in the notion that, if you "create" billions in shareholder value, you should share in the loot. But CEOs do not create stock market wealth. Investors do that, by enthusiastically buying the shares. The CEO's actions may or may not have triggered the enthusiasm by helping to generate superior results. But note the "helping". Superior corporate performance, even GE's, is never a one-man bang.
Moreover, the traffic is almost entirely one-way. Scores of billions have been wiped off the value of both household names (like Procter & Gamble or Marks & Spencer) and gee-whiz super-stars (like Amazon or Microsoft). Yet nobody would dream of suggesting that the bonuses and stock options of the boom years should be offset. Will Vodafone demand a refund from Gent if his mega-merger disappoints? Upsets could happen: one Bernie Ebbers created WorldCom by multi-merging, but his empire now looks vulnerable.
The reality is that prices for voice and data transmission, the bread-and-butter (and jam) of telecom companies, have been heading rapidly south, while the price of buying telecoms subscribers has been zooming north. If transmission becomes a dirt-cheap commodity, the merger-makers will have much difficulty in covering the Himalayan cost of the debt and equity capital that they have so rapturously expended.
Their financiers, in theory, should have been advising caution, while simultaneously acting as brakes on executive greed - shouldn't they? But bankers who live in billion-dollar glasshouses can't throw any stones. Their own fabulous rewards remove any right to criticise the pay of their clients. Naturally, their advice on M&A is entirely dispassionate, with no hint of self-seeking. Of course; yet their mega-fees, being linked to the value of deals, don't exactly offer a disincentive to mega-mergers.
After years of stock market under-performance, true, the financiers will demand chief executive heads - here and there. They will also rise in righteous anger at really outrageous terms for executive rewards. Yet several schemes have obnoxious, unopposed features like linking pay to comparative performance against competitors in the same industry. You cannot justify paying bonuses to people whose absolute performance may be awful, simply because they are the prettiest pigs in the sty.
As for lesser shareholders, they mostly applaud major mergers, on both sides of the deal. Even if they stay for the ride, investors rarely count the cost of failed amalgamations - and grotesque executive pay does less apparent damage to profits than grotty acquisitions. In the absence of genuine countervailing power, these great and worsening scandals will roll on regardless.
Governments could intervene - even outlaw stock options. But no American President or legislature will alienate their financial backers so needlessly; which means that Europeans can continue to plead the need to catch up with American rapacity. It's truly said that if you pay peanuts, you get monkeys. But if you let pussies pour the cream, all you get is very fat cats.
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