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Thu 25 Oct 2007 06:00 AM

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CEOs - overpaid & over here?

Mideast shareholders should call for restraint on the number of zeros decorating their CEOs' monthly wage slips.

With the size of executive pay packets rocketing, shareholders and critics of excessive compensation are calling for restraint on the number of zeros decorating their CEOs' monthly wage slips. If Gulf companies are serious about future listings on international exchanges, it is worth paying attention to the debate.

Backed by powerful pressure groups, these critics are an increasingly vociferous force - one that is becoming harder to ignore. The bottom line, as perceived by many, is that chief executives are paid more than they deserve and fail to provide value for money for the companies they oversee. Increasingly this appears to be the opinion not only of dissatisfied shareholders and critics of excessive pay, but of corporate directors themselves.

Gulf businesses looking to list overseas can learn valuable lessons from the debate.

In a survey released recently by the National Association of Corporate Directors, 77% of company chiefs admitted that in relation to performance, their pay was either "too high"or "somewhat high." In August, the US Institute for Policy Studies reported CEOs of large US companies earned as much in one day as average workers in the whole year. Executive pay has surged; and the gulf between the world's rich and poor is widening.

The booming private equity industry has done much to exacerbate the controversy. Individuals at the top of their game here earn eye-watering amounts. Senior figures at PE giant CVC Partners have recently been awarded record payouts of US$10m. The issue became so contentious in the UK that radical changes in the tax system have been proposed. These will see PE groups pay 80% more tax on "carried interest" stakes held in their funds.

Dissatisfied investors are further riled by the severance packages awarded to ousted executives who fail to perform. In January, Robert Nardelli, former CEO of Home Depot Inc, the largest DIY retailer in the world, was fired after an unremarkable six years at the company's helm. But a ‘golden boot' package worth an estimated US$210m, including a US$20m cash severance payment, helped to ease him through the door. Gulf businesses looking to list on overseas exchanges, particularly in the US, can learn valuable lessons from the debate. Investors are an ever more demanding bunch. Now it is not just fiscal transparency that they are after, but complete corporate transparency.

There are several ways by which executive pay could be made to reflect performance. Not least the introduction of objective methods of measuring the success of executives. Second, aligning pay with company performance based on results consistent with the interests of investors, and granting additional equity awards tied to future corporate performance, would focus executives minds on the job. Finally, full disclosure of performance targets, thresholds and peer groups used by boards to determine executive compensation would enable shareholders to make informed assessments of executive pay packets.

Certainly, if executives are to be paid such huge sums of money investors are well within their rights to demand transparent and efficient corporate governance structures. But they should also acknowledge the fact that when corporate bosses deliver the goods, their achievements should be recognised with appropriate remuneration.

Underperforming companies with conspicuously highly paid executives at their helm are an obvious target for activists. It seems the time has come for their compensation committees to address the concerns of investors and brave the boardroom with some strong negotiating tactics.

If Gulf companies are serious about listing on exchanges in London and New York, they need not only to be aware of the pressures that dissatisfied investors are able to muster: they must also be prepared to make efforts to meet these demands.

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