Government to re-examine incentive programmes for state-owned companies

Fortum bonuses under spotlight again

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The government plans to re-examine the guidelines for incentives paid out by state-owned companies, and their implementation. In addition, the government now also plans to include additional pension arrangements for corporate management, whose growth has come as a surprise to the State Ownership Steering Department of the Prime Minister’s Office.
      Minister of Defence Jyri Häkämies (Nat. Coalition Party), who is also responsible for issues related to state corporate ownership, announced on Tuesday that the incentives paid by state owned companies need to be within reasonable limits. The investigation was sparked by a story in Helsingin Sanomat at the weekend, which revealed that Mikael Lilius, CEO of the energy company Fortum had received share bonuses equivalent to three times his annual salary, in addition to generous pension benefits.
      His basic salary, bonuses, and share benefits exceeded EUR 3 million, even though the present system is supposed to cut bonuses to the equivalent of no more than one year’s basic salary - or less than EUR one million. Former Minister of Trade and Industry Mauri Pekkarinen (Centre) established a share bonus system to replace the controversial stock option incentive system.
     
Incentives and bonuses in state-owned companies were last examined in 2007-2008. The ministry of Trade and industry commissioned a report at the Helsinki School of Economics, which concluded that bonuses in these companies had remained at a competitive level.
      “Reports always conclude with the view that things are relatively well. But when repeated public debate is held on the matter, then it shows something different”, says Pekka Timonen, head of the State Ownership Steering Department.
      Timonen hopes that a “critical outside view of the situation” will be forthcoming.
      “A working group will be set up so seriously this time that hopefully we will get the means to do things better than now”, he added.
     
Political debate and anger broke out because decision-makers thought that the bonus cuts for Fortum would have an effect already on the incentives to be paid out in 2008 and 2009.
      However, this is not happening, because specified instructions came from the Ministry of Trade and Industry only after these two systems were launched.
      Before that, Fortum had interpreted the instructions in such a way that it led to an increase in share bonuses and an unsuspected increase in social costs paid by Fortum.
     
The original aim, according to Timonen, was for Fortum to pay last year’s last year’s option bonus to Lilius already in February 2005. After this, Lilius would not have been allowed to dispose of his incentive shares.
      “If Fortum had paid the share bonus to Lilius in the spring of 2005, the company’s expenses would have been about a third of what they were now. As we try to keep the costs of payment predictable, sensible, and reasonable, the time that the payment is made is very significant”, Timonen says.
      The share bonus given to Lilius, worth EUR 2.2 million, was so high because of a sharp surge in the company’s shares. Fortum’s share price in February 2005 was EUR 12, but it jumped to EUR 28 in February 2008, when the bonus was paid.
     
The fall in share prices has changed the situation. The most recent share bonus paid to Lilius came in February this year. It is in accordance with the ministry’s policy, as Lilius got an estimated EUR 720,000 in gross income from it. This is slightly less than his basic annual salary.


Previously in HS International Edition:
  Political controversy over Fortum stock option perks escalates (29.9.2005)
  State-owned companies tight-lipped about executive bonuses (21.5.2007)
  Energy company Fortum to scale back lucrative perks to management (16.3.2006)

Helsingin Sanomat