"I don't know for a fact but it is almost a certainty that people are doing their numbers on us," said Richard Lapthorne, chairman of a then-unified Cable & Wireless, in November 2005. By "people" he meant private equity funds, who at the time were in aggressive leveraged buyout mode. A few months later Lapthorne produced his remedy to this perceived threat: Cable & Wireless would incentivise its top directors and managers with private equity-style rewards.
This "idiosyncratic" approach – Lapthorne's description – was eventually approved after some argy-bargy with shareholders. Executives could share £216m if they doubled the share price in four years to 214p. John Pluthero, head of one half of the company, could make £22m if he hit the jackpot.
What followed will surely rank as a fine illustration of how not to link boardroom pay to performance at a public company. After three decent years for C&W, Pluthero scooped £10m and his sidekick Jim Marsh got £9m. They didn't achieve the very top jackpots – but they were paid 100% in cash.
A demerger followed. Cable & Wireless Worldwide (confusingly named since it mainly operates in the UK) and Cable & Wireless Communications (mostly international) became separate listed companies. It's been downhill all the way since, with CWW – Pluthero's half – setting the pace. Three profits warnings, each accompanied by claims that the company was fundamentally strong, suggest the company declared victory, and paid out, too early. From 90p at demerger, CWW share price is 22p after today's 26% plunge.
The value of the combined Cable & Wireless company now sits massively below its 2006 value. Add the two companies' share prices together – a legitimate exercise because of the clean structure of the demerger – and you get just 60.5p.
Pluthero is heading for the exit but, naturally, gets to keep his winnings of £10.2m since the principle of clawback, lately introduced at banks, has yet to arrive at non-financial companies. That, we must conclude, was another of Lapthorne's oversights when he drew up his copycat scheme. Private equity payouts happen when value is crystallised permanently, usually via a sale. At public companies, there is no equivalent. An experiment never to be repeated, let's hope.
