Xstrata Merger: New Pay Row Looms

Tens of millions of pounds of controversial retention payments which form part of the proposed $80bn merger of Glencore and Xstrata would be awarded to executives not directly involved in managing mining operations, I can reveal.

As much as £28m of a total package worth £140m will be paid to senior Xstrata head office staff rather than those who run its mines, according to people close to the company.

News that as much as 20% of the payouts would be made to Xstrata employees not involved in overseeing its core mining assets risks reigniting a shareholder row which has repeatedly threatened to scupper the world's biggest corporate merger this year.

The retention package has been the most contentious element of the merger, which will create a global mining and commodities trading powerhouse.

Agreed in January, the bonuses will be paid to 72 employees who remain with the combined company for a fixed period following the completion of the deal. The terms of the payouts are final and will not be amended, insiders said today.

Xstrata has argued in public statements that the payments would be made to "key Xstrata managers [needed] to run the combined group's mining operations" and "whose positions are critical for our businesses and whose continued employment is key to integrating the two businesses and maintaining and enhancing the value of its operations and growth projects".

I understand that about 15 of the individuals work in central administrative and strategy functions at Xstrata's head office in Zug, Switzerland although the precise number is known only by the boards of the two companies and a handful of advisers.

A number of Xstrata shareholders have asked to see the list of employees included in the so-called Management Incentive Arrangements in recent months. Xstrata is understood to have rejected their requests, although Glencore has seen - and approved - the list of names, insiders pointed out.

"This underlines the lack of transparency we have been talking about since the deal was announced," a major Xstrata shareholder said.

Sir John Bond, Xstrata's chairman, said earlier this month: "Without the ability to retain key Xstrata managers to run the Combined Group's mining operations through the Revised Management Incentive Arrangements, the Independent Xstrata Non-Executive Directors believe that the value proposition of the Combined Entity is at risk."

Some of Xstrata's most prominent shareholders, including Knight Vinke, Schroders, Standard Life Investments and Threadneedle Asset Management have criticised the payments.

This month, Glencore and Xstrata unveiled a revised structure for the merger, which will allow investors to vote against the retention package without blocking the deal. It involves an improved financial offer from Glencore but would see Ivan Glasenberg, Glencore's chief, replacing Mick Davis, his Xstrata counterpart

People close to Xstrata said today that the company had the leanest head office among any of the global mining companies.

They added that Glencore's recent listing on the stock market meant the combined group would rely on Xstrata managers' greater experience of running a quoted company.

Some of the 70 managers' retention payments would be subject to performance conditions, they said.

A shareholder vote on the merger is expected next month. There has been no public statement so far from Xstrata's biggest shareholder, a Qatari sovereign wealth fund, although it is likely to support the merger.

Xstrata declined to comment.