Executive pay: Fat-cat failures

When, barely a month before Christmas, England football manager Steve McClaren picked up a cheque for £2.5m for his resounding failure to get the team through to the finals of the Euro 2008 tournament, he automatically gained entry to one of the world's highest-profile, yet least popular international clubs.

The 'fat-cat failures' is a group of former MPs, directors and sporting figures who have successfully turned logic on its head by attracting enormous rewards for being no good at their jobs.

Although mere mortals fume at the sky-high payouts for apparent incompetence - particularly when they themselves may be asked to accept only modest rewards for being rather good - the issue of 'managing out' a high-profile poor performer is trickier than it might first appear.

"If someone in business or sport has a rare talent and an organisation is determined to recruit them, the implications of poor performance a year or so later don't come into the equation," says Vanessa Robinson, organisation and resourcing manager at the Chartered Institute of Personnel and Development.

Human resources input from the start

Robinson feels more attention needs to be paid to performance criteria and the likely risks when senior hires go pear-shaped.

"While we don't want HR to assume that all well-paid people will fail, it is worth keeping tight control on what they are expected to achieve and even on how their exit will be managed in the worst case scenario," she says.

But what influence can HR have over whether a high-profile poor performer gets a pay-off? Senior HR professionals are likely to be involved in designing top-flight exit packages, says Robinson, but will play less of a role in hiring negotiations.

"It tends to be the job of remuneration committees to work out the finer points of a recruitment package at senior levels, and to build in at least some performance measures, but ultimately, HR too needs an input, not least because headlines about fat-cats being rewarded for failure do no good for staff morale," she says.

When star performers are brought into an organisation on the strength of their previous track records, there is understandable optimism that what they achieved for organisation X will be replicated at organisation Y.

All too often, however, we expect too much of our new recruits.

Michael McCarthy, a senior associate at the law firm Lovells, who has been involved in hirings worth tens of millions of pounds, says: "What you might call 'flavour of the month' syndrome is widespread throughout industry and what it comes down to is expecting miracles from a star hire.

"It's comforting to believe that candidate X can solve all of organisation Y's problems because they have performed so well at firm Z, but in reality, all of us perform differently in different environments. Replicating precisely what we have done before is unlikely."

'Managing out'

Once the initial honeymoon is over, an employer may decide to look elsewhere to meet these expectations, yet trying to get rid of a star hire without paying too much can cause more problems, says McCarthy.

The procedures for 'managing out' are shrouded in confidentiality, not least because there is a standard requirement not to be publicly derogatory on either side, but McCarthy believes that better legal advice and increasingly complex legislation have helped to bump up exit packages.

"Top-tier people are well aware of their vulnerability when things go wrong and if they have any sense - which most of them do - they ensure that their exit strategy is well worked out before they take on a high-profile job," McCarthy says.

"Going before you are pushed may cost you an awful lot in terms of severance, however distressing it may be to hang on. So not only do the clever ones take legal advice and refuse to resign in the event of disappointing performance, but many of these exit situations now end up involving the threat of extended discrimination claims."

Fall from grace

In fact, many well-paid executives subject to a 'managing out' process will be advised to claim sex or age discrimination simply to enhance their package. However, while staff may be astonished to learn how much it costs to get rid of a senior hire, the truth is that this may be a drop in the ocean when set against how much it could cost a firm to keep them on.

Whatever the circumstances surrounding a crashing fall from grace, how can HR help to manage expectations?

Olwyn Burgess, director of client services at HR consultancy Chiumento, believes that although skills shortages will continue to inflate management expectations of the gifted and well-paid, there should, in the HR department at least, be room for some compassion.

"It may be that your star hire has already peaked, or simply that the board won't let them get on with what they're best at. Either way, the firm is going to be disappointed with their performance," she says.

"When people come in to your organisation on top salaries, they are successes, not failures, and they have every right to protect their future income and their professional reputation."

Ultimately, it's up to HR to give top executives the same consideration as they would someone being managed out from the junior ranks, says Burgess, even if the sums at stake are eye-watering.

"Senior people are not as heavily policed as others in terms of their performance, but in terms of sheer expectations, the weight on a star hire's shoulders can be simply enormous," she says.

Red-faced fat-cats who still got the cream

• Adam Applegarth, the former chief executive of Northern Rock, resigned from the bank after its collapse last autumn, but stayed on in a caretaker role until December, when he walked away with a payoff of £380,000, half his annual salary.
• Paul Gray, former chairman of HM Revenue & Customs stayed on when one million people were sent inaccurate tax bills, but it was last November's missing data fiasco that finally triggered his resignation. Part of his payoff was a £1.8m pension deal.
• Stan O'Neal, the former chief executive and chairman of investment bank Merrill Lynch, earned more than £24m in 2006 alone. During August and September 2007, as Merrill Lynch was racking up the biggest losses in its history, he found time to play 20 rounds of golf. In October, he announced his retirement and walked away with a compensation package valued at £78m.
• Steve McClaren has been consigned to the record books as the least successful football manager in England's 135-year footballing history. His fate was sealed by a 3-2 defeat against Croatia in the final Euro 2008 qualifier at Wembley last November, when he and his team were booed by England fans. Just 18 months into the job, McClaren walked away with £2.5m. The Football Association estimates that failure to qualify will cost it £10m in lost revenue.