Bonuses for Eircom chiefs were linked to flotation price

Bonuses of €1.2 million (£957,564) paid last year to Eircom chief executive Mr Alfie Kane and Mr Malcolm Fallen, the finance director, were linked to the company's flotation price of €3.90, which Mr Kane subsequently acknowledged as "on the high side".

Eircom confirmed yesterday that the €8.5 billion stock market valuation achieved when the company floated in July last year was a factor in determining the size of the bonuses paid to the two men.

Eircom shares were floated at €3.90 and spiked upwards after the initial public offering (IPO) to €5, but have fallen steadily since them. Last night they closed at €2.57, near their all-time low.

The company has tried to distance itself from the process by which the share price was set. However, although the final decision was made by the Government on the advice of Allied Irish Banks and Merrill Lynch, the board of the company approved a prospectus setting a price range. Eircom has since pointed out that its own advice from ABN Amro had argued for a price considerably below the range suggested by AIB and Merrill Lynch.

Last May, when the company published its results Mr Kane acknowledged that the shares had been priced "on the high side which is not very far from saying you got it wrong". The Eircom annual report, published this week, gave details of Mr Kane's and Mr Fallen's remuneration for last year. It revealed that, on top of their combined salaries of €689,737, the two mean shared a €1.2 million bonus, of which roughly two-thirds went to Mr Kane.

"The bonus payments made in 1999/2000 include payments in respect of the IPO," according to the accounts. Mr Kane received another bonus payment of €952,176 in respect of previous years.

Eircom said last night that the €1.2 billion represented a success payment in recognition of Mr Kane and Mr Fallen achieving a number of objectives connected with the IPO.

A major component on this would have been a high valuation for the company - only achieved through a high share price - when it went to the market.

"Mr Kane would have wanted to achieve a valuation for the company which adequately reflected the value of the company compared to its peers," an Eircom spokesman said yesterday.

Other factors that affected the size of the bonus were the extent to which the public participated in the share offer and the support of the large investment institutions. Some 500,000 members of the public took part in the biggest ever sale of a State asset and more than 340,000 small shareholders are still on the register.

Between them they own 408 million shares in the company and assuming they all bought at the €3.90 share price, they were sitting on an average loss of €1,200 last night.

The company's annual report shows that 55 shareholders - large Irish investment institutions - own 78 per cent of the shares in the company.

These institutions are expected to vote in favour of an executive share option scheme for Mr Kane and 400 other senior managers, which will be put to the company's annual general meeting on September 13th.

It is expected that many of the small shareholders will oppose the scheme.