Outlook: Supermarket isochrones prove all too much for the OFT

If you don't know your isotope from your isochrone, or your Herfindahl-Hirschmann Index from your index finger, then don't bother to read the extraordinarily confusing Office of Fair Trading case for referring all four trade bidders for Safeway to the Competition Commission, which was posted on the web yesterday.

No wonder the OFT, after many weeks spent with a cold towel wrapped around its head, found the whole subject too difficult to adjudicate, and opted to offload the problem on to the Competition Commission instead. Reading yesterday's advice was like wading through treacle. To those that managed it, the upshot seems to be that Tesco stands virtually no chance of being allowed to acquire Safeway, and both Asda and Sainsbury face an uphill struggle.

Even dear old Wm Morrison, which hoped to avoid a reference altogether because of the supposed lack of overlap between its supermarkets and those of Safeway, appears to have shot itself in the foot in the way it presented its argument. By applying longer drive times than the others to its analysis of the overlap, it has ended up with an astonishing 70 Safeway stores within driving distance of its own. There's a big difference, of course, between the degree of overlap and the number of disposals the competition authorities might require.

For instance, in and around the Brent Cross supermarket, which is owned by Tesco, a nine minute drive would catch six other supermarkets but an 11 minute one would catch double that. The overlap is clear, but would a disposal really be required when there are so many other competitors in the area?

In any case, the amount of competition encountered in each locality depends crucially on what assumptions are used. Differing speeds were used by the different bidders in making their assessments, and to make matters more complex still, some incorporated greater delays at junctions than others. Don't even ask how the parameters are changed if you happen to run into a traffic jam.

All four trade bidders said yesterday that they were more confident of eventual clearance now having read the reasoning than before, but it's hard to see why. If the OFT cannot make its mind up how many stores each company should be required to dispose of in order to safeguard competition, why should the Competition Commission fare any better?

Forget the isochrone, drive time and relative pricing arguments, there has always been a common sense case for allowing Wm Morrison, so as to create a viable fourth national force in the supermarkets business, and disallowing all the others. I've long suspected that the underlying purpose of the others in bidding is to stop this from happening, and by the look of yesterday's gobbledegook, they may well have created enough confusion to succeed.

If Philip Green, the only bidder so far to get the green light, ends up as owner of Safeway, so much the better. He knows nothing about food retailing and would probably be forced to trash the business to pay off his bid debts. Good news for the the others, but what about the consumer?

Excessive pay

According to its promotional blurb, Cookson is a leading materials technology company supplying to customers worldwide. It also complies fully with the Principles of Good Governance set out in the Code of Best Practice annexed to the Listing Requirements. Unfortunately, all that good governance has failed to prevent a meltdown in the share price, which over the past two years has collapsed from more than 160p to less than 18p. Cookson is today worth little more than the £277m of additional capital it raised in a rescue rights issue last August.

Nor has the company's exemplary governance procedures – so exemplary that most of the reforms being proposed by the Higgs review of the role of non-executive directors are already anticipated – prevented another case of boardroom pay excess. In a year when the company's performance was so poor that it nearly went bust – despite the rescue rights, it is still touch and go – the salary and benefits of Cookson's chief executive, Stephen Howard, rose from £761,000 to £987,000, thanks largely to an annual incentive bonus of £172,000.

What could it have been that Mr Howard did to earn his incentive bonus? The accounts are only partially helpful. Apparently, it was for the "achievement of group cash flow targets and personal objectives". What the latter are is anyone's guess, but if Mr Howard can illuminate me on how successfully to persuade your employer to remunerate you on the basis of achieving personal objectives, I'd be happy to buy him an expensive lunch.

I've got nothing against Mr Howard, but this really is an indefensibly high pay package for such a shrunken wreck of a company. Helpfully, the company provides some relative performance charts in its annual report, as if to rub home the point. These show that in terms of total shareholder return over the past five years the company has hugely underperformed both the FTSE 250 and an average of the engineering, machinery, electronic and electrical equipment sectors.

Poor performance and executive excess all too frequently go hand in hand, but it is not just in poorly performing companies that executives are paying themselves far too much. In such cases, the excess is very visible, but the reality is that executive remuneration is out of control across the board.

Through thick and thin, regardless of performance, it continues to rise, deserved and undeserved alike. The only limit on what senior executives can earn seems to be their powers of negotiation. When things are going well, nobody's going to quarrel with bumper pay packages all round, and when things are going badly, you had better pay your executives well because it's a tough job they are doing and they might just go elsewhere if you don't. A whole industry of consultants has grown up to support and argue the case for ever rising levels of executive remuneration.

Fast back to the late 1960s, and American chief executives would generally be earning something like six times average pay in their companies. Today, the multiple would be more like 40 and rising. It's a bit less than that in Britain, but not much, and in some cases it is very much higher. Even in boom times, such pay differentials are hard to justify, but in today's much tougher business climate they begin to look almost obscene. For the record, the multiple at Cookson is 35 times.

The bottom line is that executive pay and perks are continuing to rise at an extraordinarily rapid rate even though earnings, and in some cases including Cookson, dividends too, are shrinking. Corporate fortunes wax and wane, and it is not always the fault of the chief executive that the performance is poor. He may simply have been dealt a bad hand. But the multiple of average per capita payroll cost that goes to the CEO has always seemed to me a pretty good indicator of trouble in the making.

In the depths of the last recession, Zafar Khan, an analyst with SG Securities, applied the test to the companies in his sectors. With the majority, the multiple was 15. But at Hanson, TI Group, Tomkins, Williams, Siebe, Lucas and Vickers, the multiple was considerably higher. In five out of seven of these companies, the chairman and chief executive were the same man. Four of these companies no longer exist, and nearly all of them have performed abysmally since. Mr Kahn thought the multiple of highest paid to average per capita payroll cost a useful insight in the overall assessment of corporate governance.

As we now know, applying the rules of good corporate governance doesn't seem to make much difference. But the analysis, which Mr Kahn likes to call "The Taking the Micky Index", is still just as valid. The higher the multiple, the more likely the company is to underperform or fail. So which companies fail the test today? An analysis for another time, I think.

jeremy.warner@independent.co.uk