A leading investment bank yesterday took the highly unusual step of downgrading Cable & Wireless (C&W) in response, in part, to a controversial executive incentive scheme.

Morgan Stanley calculated that plans by C&W to remove a cap on its long-term incentive plan could mean that John Pluthero, the company’s UK head, receives £27 million even if the group’s share price remains flat.

C&W has claimed that the removal of the cap, which prevents top individuals in the company from netting more than £20 million, would further motivate staff and align their interests with shareholders.

However, Mr Pluthero’s ability to win that much money regardless of a share price change suggested that it was as much a reward scheme for past performance as it was an incentive scheme, Morgan Stanley said. Under its models, the bank said that Mr Pluthero had already theoretically secured £20 million. The removal of the cap would net him a further £7 million.

In a note to clients, the bank said: “If the LTIP cap is removed, the UK CEO’s earnings will rise to £27 million, even if the current price stays flat for two years, on our estimates.”

Morgan Stanley said that Mr Pluthero “is effectively [being] rewarded for performance that is already reflected in the share price”.

The question mark over the scheme contributed to its decision to downgrade the stock, which closed yesterday at 196.2p, up 0.2p, from “overweight” to “equal weight”.

C&W dismissed the note. A spokesman said: “The size of any payments are at best speculative and they depend on the share-price performance at the point that the scheme concludes in April 2010, adjusted for financing. To attribute values as Morgan Stanley have, some three years away, is somewhat premature.

“For John Pluthero to receive £27 million on Morgan Stanley’s numbers, the value of the UK business would have to rise by some 50 per cent from today’s base.”

However, the note is likely to inflame further relations between the telecoms group and shareholders before its annual meeting on July 20.

Last week the Association of British Insurers, the powerful shareholder lobby group, issued an “amber-top” warning on C&W because of questions over its controversial pay scheme.

Pirc, the shareholder organisation, has also urged its members to vote against the group’s “limitless” bonus plan. It said that the awards available to C&W executives were “significantly in excess” of its best-practice guidelines. It added that the performance targets laid out by the telecoms group were “not considered challenging”, given the level of awards available.

— The National Association of Pension Funds is urging Vodafone shareholders to reject a £38 billion “value-creation” plan from ECS, a rebel investment group, at its annual meeting on July 24. RREV, which is partly owned by the NAPF, is, however, urging shareholders to vote against the reelection of Michael Boskin as a director.

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