Eircom shareholders will be astonished to see the large salaries and bonuses paid to its two senior executive directors last year. And they surely have grounds for dissatisfaction. The value of the shares held by members of the public has fallen by a third since the flotation. Yet the group's two senior executives received £2.2 million between them in the last financial year.
Big companies need to pay handsome salaries to attract the best management. Mr Kane has been on a basic salary of around £300,000 per annum, not unreasonable for a company the size of Eircom. However, it is the size of additional bonus payments paid in the year to March that is extraordinary. Some of this money related to previous years and some to once-off payments triggered by Eircom's flotation on the stockmarket. While a precise break-down is not given, it appears that Mr Kane's total package came to some £1.5 million, with the rest of the £2.2 million going to Mr Malcolm Fallen, the finance director.
Eircom's annual report says that the bonus payments are "based on achievement of business objectives" and also include payments related to the stockmarket offering. No precise details of the methodology used to calculate the payments are given. The awarding of bonuses was overseen by Eircom's remuneration committee, chaired by group chairman, Mr Ray MacSharry, and also including three other non-executive directors. In turn, Eircom rewards these non-executive directors well, paying them £36,000 each per annum on average with Mr MacSharry apparently getting in excess of £100,000.
Few would dispute the payment of appropriate bonuses to directors, based on challenging criteria. But Eircom is a group which, while reporting a reasonably healthy rise in profits last year, has had its problems. An alliance reached by the group with KNP of the Netherlands and Telia of Sweden has fallen apart. And its future strategy remains to be fully spelt out in terms of how it will expand abroad, meet additional competition at home and exploit the opportunities offered by broadband communications and the Internet. These issues are part of the reason for the 33 per cent fall in the share price.
Eircom management cannot be held entirely responsible for the price of the company's shares. They did argue for a lower float price and the shares are heavily affected by international sentiment to the sector. Yet surely the remuneration committee should take into account the share price performance in determining appropriate bonus levels?
Now Eircom shareholders are being urged by the group to approve a share option scheme. Such schemes are legitimate ways of offering incentives to executive directors. But Eircom is not indicating in the documents sent to shareholders the price at which the options will be issued. The value of options depends entirely on the share price at which they are granted; shareholders are thus being offered a classic "pig in a poke."
The share option scheme has been approved by the major investing institutions. This means that it is likely to be passed at the annual general meeting next month. However small investors can also vote, either by attending the meeting or by sending in proxy forms, and a sizeable vote against the scheme would send a strong message to Eircom management. And so would some close questioning of chairman Ray MacSharry at the meeting about the basis on which the unacceptably large bonuses were paid last year to senior executives.