Retention bonus a bitter pill for GSK shareholders

Source: Management Today

Shareholders are getting increasingly stroppy about execs getting big bonuses just for staying put...

GlaxoSmithKline has become the latest big company to face a shareholder revolt over plans to pay out retention bonuses to senior executives. Only about 60% of investors backed a plan to pay a £2.5m bonus to the company’s US head Chris Vierbacher in February – a pretty underwhelming show of support for the company’s remuneration report.

GSK made a £2.5m stock award to Vierbacher (who runs the company’s US pharmaceuticals business) just after he lost out to Andrew Witty in the race to succeed Jean-Pierre Garnier as CEO. The idea was to stop him storming off in a sulk to one of Glaxo’s rivals – in much the same way that pharma boss David Stout immediately quit after being passed over for the top job (nobody even seems to know if he had another job to go to). In other words, Vierbacher’s in line to pick up an additional £2.5m just to continue doing his job – assuming he sticks around until the end of 2011, that is.

To be fair, GSK shareholders have got form for this kind of thing – in 2003, chief exec Garnier saw his £11m pay package voted down by investors, forcing him to settle for a somewhat smaller sum. (This AGM was Garnier's last in charge, and by the sounds of it he got a pretty rough ride from investors unhappy about the drug-maker's turgid share price performance).

However, this particular issue is clearly raising hackles across the corporate landscape – earlier this week Shell saw nearly half of its investors refuse to back a plan to pay a one-off bonus of nearly £2m in shares to three of its top execs. Again, it boiled down to a succession issue – all three are in line to replace CEO Jeroen van der Veer when he leaves next year, and Shell wants to make sure they’re all well and truly shackled in golden handcuffs before the decision is made.

Of course, succession is always a tricky issue. In an ideal world a company will want to have a number of competent and ambitious candidates when the CEO steps down – but only one can be top dog, and the others will invariably be left disappointed. So we can understand why companies try to use retention bonuses to tie in their top talent and minimise disruption when the new boss is appointed.

But the question is: are these bonuses actually worthwhile? Many shareholders are sceptical, not least because (unlike GSK’s deal) they often have no link to performance – the company is just paying the beneficiary a large sum of money to do nothing. If only we could persuade our paymasters to do the same for us...

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