Breaking the bonus mould

Bonus and option schemes are used by most listed companies, as they seek to align the interests of their executives and their shareholders, but the way these schemes apply in practice varies enormously.

Annual bonuses were highly lucrative for some of Western Australia’s top chief executives last year, none more so than for John Young and his colleagues at investment scheme manager Great Southern Plantations.

The senior executives at Great Southern were given bonuses ranging from 150 per cent to 200 per cent of their base salary.

Normally the bonuses are capped at 100 per cent of salary, which as discussed below is a higher level than at many other companies.

But Great Southern’s remuneration committee decided “discretionary exceptional bonus payments” were also warranted because of the company’s exceptional performance.

As a result, managing director John Young received a cash bonus of $1.4 million, taking his total income to $2.1 million, while executive director Cameron Rhodes received a bonus of $850,000, taking his total to $1.4 million.

At the other end of the bonus spectrum is profitable gold miner Equigold, which has a policy of not paying performance-based bonuses.

Most Western Australian companies pay annual bonuses that sit somewhere between these two extremes.

At engine technology firm Orbital, short-term bonuses are limited to 20 per cent of salary.

Home Building Society’s new managing director, Craig Coleman, can earn an annual bonus of $100,000, which equates to 28 per cent of his $350,000 salary package.

At nickel miner Minara Resources, cash incentives can range up to 30 per cent of base salary.

Coventry managing director Chris Glenn can receive a short-term bonus of up to 35 per cent of his base salary, and in addition may receive shares worth up to 25 per cent of his base salary, subject to meeting three-year performance targets.

Tap Oil pays short term incentives up to 40 per cent of base salary while long-term incentives can be up to 80 per cent of base salary.

At Foodland, the annual bonus can be up to 50 per cent of base salary.

Wesfarmers caps short-term incentive payments at 60 per cent of fixed salary, while its long-term incentive scheme, paid in the form of shares, is capped at 50 per cent of total income.

West Australian Newspapers managing director Ian Law can earn a bonus of up to 65 per cent of his base salary.

Engineering and contracting company Macmahon has a two-fold bonus scheme for managing director Nick Bowen.

If he achieves defined goals in terms of safety, earnings per share, order book levels and return on capital, he can earn up to 50 per cent of his base income of $735,000.

For “exceptional” results, Mr Bowen can earn a further 50 per cent bonus.

New Woodside managing director Don Voelte can earn a short-term bonus of up to 62.5 per cent of his base salary (of $1.35 million).

In addition, he participates in a long-term incentive scheme targeted to deliver payments of up to 60 per cent of his base salary.

OceanaGold, which aims to more than double gold output by developing new mines, has offered even bigger incentive payments to new managing director Stephen Orr.

He can earn bonuses up to 150 per cent of his base salary (of $1.16 million), dependent on growth in OceanaGold’s share price, gold reserves and gold production.

Consolidated Minerals takes a different approach.

A proportion of after-tax profit that exceeds a 12.5 per cent return on shareholders’ funds is paid into a profit sharing pool, with payments to individual executives capped at 100 per cent of base salary.

Evans & Tate employs a similar concept, with a bonus pool of 5 per cent of ‘market value added’ for each financial year.

PERFORMANCE MEASURES

• Bonuses are normally tied to company performance.
• Key performance measures include return on equity, earnings per share, profit before interest and tax, safety, sales.
• Long-term bonuses are often tied to total shareholder returns (TSR) over a three-year period.
• Companies seek to measure performance relative to their peers.