Unilever will modify its board pay scheme following last week’s Q1 results. The consumer products giant last week reported a smaller than expected fall in profits, which was well received by investors – particularly since sales and margins saw strong growth. While it’s hit short-term earnings, Unilever’s cost-cutting “path to growth” strategy seems to be paying off in the long term. Relating executive pay to performance should boost the effort further.
Anglo-Dutch food giant Unilever has announced that as part of its “path to growth” strategy, it willl change its executive pay arrangements to be more performance based. This follows last week’s Q1 results, which showed a fall in profits due to restructuring costs.
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In October 2000 Unilever paid $24.3 billion for Bestfoods, which manufactures Hellmann’s mayonnaise and Knorr soup. Unfortunately this effectively left it with two sales forces in 18 European countries. Cuts are therefore inevitable as Bestfoods is absorbed into Unilever. The integration has already started, with necessary job losses made and a planned review of manufacturing plants due for completion by Q3. The firm plans to axe 8000 jobs and close 30 factories. These moves alone should save Unilever a significant E830 million by 2003.
The cost cuts and the integration of Bestfoods’ operations are also part of a wider Unilever strategy, called “path to growth”. The target of the program is to raise the company’s operating margin to 16% by 2004. It’s already some of the way there, having increased margins to 12.4% for the last quarter.
As part of the scheme Unilever has also cut back on privileges given to its top executives, slashing a lucrative two-year notice period on contract termination to a single year. To soften the blow to executives Unilever has asked its shareholders to approve a modification of its boardroom pay policy. The company hopes to give board executives a bonus substantially higher than the maximum currently allowed, and to give them performance related share rewards.
Despite these expenses, the “path to growth” plan seems to be going well. It is the major driver behind these better-than-expected Q1 results, especially impressive in today’s shaky economic climate, and also justifies an optimistic outlook for the rest of the year. Unilever’s road to future growth, then, looks rather more pothole free than the profits fall would suggest.
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