An extraordinarily generous scheme to reward senior staff based on company performance has been exposed at Fairfax and sheds new light on the recent frenzy of cost cutting at the company.

While Fairfax executives have claimed that the sacking of 550 staff is unavoidable, due to a decline in classified revenue and the advent of new technology, insiders say these reasons are less significant than a secretive $4 million scheme to reward the most senior executives with share packages based on the company’s share price and earnings.

Crikey has learnt that last December, a few days before Christmas, the most senior Fairfax managers in Melbourne and Sydney were summoned to secret meetings convened by the Fairfax deputy CEO, Brian McCarthy.

The meetings were well attended. For example, around 30 people went to the meeting in Melbourne. Executives from across the mastheads were invited, including a few senior editorial staff.

McCarthy made it clear that no one should discuss what he was about to tell them outside the room, presumably to prevent those who had not received an invitation, especially the journalists in the news rooms, from finding out.

He then proceeded to explain his novel plan, known as the Long Term Incentive Scheme, designed to reward them all for their hard work and company loyalty.

Under the LTIS, managers are allocated shares as a percentage of their base salary. Those on around $400,000 could expect as much as $160,000 in shares. In Melbourne managers in this salary bracket would include the MD of The Age, Don Churchill, the CEO of the Southern Region, Alan Browne and the COO of The Age, David Skelton.

Under the scheme, Fairfax purchased around $4 million in shares in February, when the share price was over $4 and placed them in trust. The shares mature on 30 June 2010, when they become vested to the recipients, so long as Fairfax meets a range of key performance targets.

The targets are based on where Fairfax sits in relationship to the top 300 ASX companies, especially the top 150, and how Fairfax’s earnings per share and share price are tracking.

Unsurprisingly one executive at the meeting commented that the deal sounded like an early Christmas present because it seemed so generous. As one insider told Crikey, managers with the largest share allocations would have a “good incentive to slash and burn”.

Perhaps the scheme should be described as a birthday present instead, because under the terms all the members get the benefit of the dividends even while the shares they’ve been allocated are held in trust by Fairfax. The next dividend pay-out date is 2 October 2008, and that just happens to be Brian McCarthy’s birthday.

It is not known whether the Fairfax CEO, David Kirk, or McCarthy himself are also signed up, but if they are, they could expect share allocations worth substantially more than their senior managers.

The recent bounce in shares after Fairfax revealed it will slash jobs and costs would have been comforting to the executives on the scheme, and may, according to some insiders, have been a motivation for the decision to cut so deeply. But with the current share price languishing at around $2.90, they’ll be hoping the cuts lead to a turn-around to maximise their fortunes.