BT's top two in line for pounds 500,000 bonuses

The two most senior executives running British Telecom are each likely to receive pounds 500,000 bonuses this year, almost doubling their annual salaries and catapulting them into the select group of British business leaders paid more than pounds 1m a year.

Industry sources said annual cash bonuses for Sir Iain Vallance, BT chairman, and Sir Peter Bonfield, chief executive, would be raised dramatically in recognition of their "outstanding" performance during 1996, which saw the pounds 13bn merger announcement with US long-distance partner MCI and several other overseas deals, including BT's pounds 1bn stake in a French joint venture.

The executive pay committee headed by Sir Colin Marshall, BT's deputy chairman, is thought to have approved the increases in principle and will meet later this month to sign off the payouts. The group's scheme limits annual bonuses at 50 per cent of salary, raising the prospect that Sir Colin's committee may temporarily remove the cap to reflect what analysts agree has been an "exceptional year" for the company.

BT previously insisted its executive pay structure met the best practice recommendations of the Greenbury Committee, which said pay should reflect performance. The company is likely to argue that Sir Iain's bonus increase would be justified because he was the main driving force behind the MCI deal. Sir Iain's basic pay went up by pounds 20,000 to pounds 500,000, while Sir Peter's salary has already risen this year by pounds 95,000 to pounds 570,000.

A pounds 500,000 bonus for Sir Iain would represent an increase of more than 200 per cent on his last discretionary payout of pounds 162,000 for the year to the end of March 1996, which itself represented a 40 per cent rise on 1995. Similar comparisons are not possible for Sir Peter, who joined BT from computer giant ICL at the start of 1996.

One analyst, who did not want to be named, suggested BT's complex system of executive bonuses, based around personal performance targets, could be revised to reflect the MCI merger. Each year staff are encouraged to improve upon individual performance criteria. This suggests the bonus increases could be duplicated for other board members and senior executives. Another winner would be Robert Brace, finance director designate of the merged group, to be renamed Concert. His basic salary has already risen by pounds 50,000 to pounds 250,000.

The bonuses will be disclosed in BT's annual report, to be published in May. However, BT could face a summer of discontent from its band of small investors, similar to the furore over British Gas's 75 per cent pay rise for its former chief executive, Cedric Brown.

At the annual general meeting in July shareholders will also be asked to approve a replacement for BT's complex long-term executive bonus scheme, introduced in 1994, which could give managers up to a further 100 per cent of basic salary, paid out in the company's shares. Sir Colin's team is expected to propose a simpler scheme.

The annual bonuses will narrow the pay gap between BT's senior management and MCI's, where staff have traditionally been paid partly with generous share options. Bert Roberts, MCI's chairman, is expected to receive cash and shares worth almost $90m (pounds 55m) if the deal is approved, while some 200 employees will make at least $1m each from the merger.

Staff at MCI are unhappy at BT's plans to end the share option culture, fearing it would remove their incentive to outperform competitors.