20/11/2017 - 15:32

CEO incomes on the rise

20/11/2017 - 15:32

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SPECIAL REPORT FOR SUBSCRIBERS ONLY: The annual Business News remuneration survey has data and in-depth analysis on hundreds of WA company directors and executives. We identify the top earners, including the people who qualified for large bonuses and equity incentives, in some cases year after year. The survey also reveals a big jump in the number of WA people who earned incomes of $1 million or more last financial year.

Allan Feinberg says incentives should be based on ‘hard deliverables’ that can be clearly measured. Photo: Attila Csaszar

If there is one figure that stands out in this year’s remuneration survey, it’s the number of executives and directors at Perth-based listed companies with total remuneration of $1 million or more.

That number has risen to 113, a big jump from last year’s 72 and close to the record number of 118 recorded in 2011 (see graph).

Undertaken in partnership with BDO, this survey is the most comprehensive since Business News started keeping tabs on executive remuneration 16 years ago, so that factor may account for some of the increase.

But the trend also provides insights into Western Australia’s emerging recovery from the slump of recent years.

(Download this article and a list of the top 80 WA earners as a pdf here.)

To see more extensive data, go to https://www.businessnews.com.au/executive-salaries

A handful of big companies accounts for a disproportionate share of million-plus incomes.

Woodside Petroleum’s annual report discloses nine Perth-based executives who had incomes of more than $1 million.

Wesfarmers has a similar number, but most of its top executives are based on the east coast and therefore are not included in the survey.

Mineral Resources (five), South32 (four) and Fortescue Metals Group (three) also had multiple people in the ‘millionaires club’.

Emerging lithium producer Pilbara Minerals was another company with multiple people (four) in the same category.

This is a telling sign of the improving prospects for mining companies, and even some emerging technology stocks.

For Pilbara Minerals, nearly all of the income attributed to its senior executives comes via equity-based payments, which need to be reported and valued according to prescriptive accounting standards.

Managing director Ken Brinsden has a $330,000 base salary, which is fairly typical for people running small to mid-cap mining companies.

The whopping valuation placed on his equity incentives ($2.9 million) will not necessarily be realised as actual income.

That depends on how well the company performs and what valuation the market puts on its shares.

Nonetheless, the valuation attributed to the equity incentives is an indication of the upside potential for stocks such as Pilbara Minerals, and it’s not alone.

The survey shows more than 30 Perth-based executives were awarded shares, options or long-term incentives worth $1 million or more last financial year.

Many of these people are from big companies such as Wesfarmers, South32 and Fortescue Metals Group.

Others are from the likes of Sky and Space Global, and Quantify Technology Holdings.

While the ultimate value of long-term equity incentives is inherently uncertain, the same cannot be said for annual cash bonuses.

Five Perth executives, including Richard Goyder, Nev Power and Peter Coleman, got $1 million-plus annual bonuses.

This group also includes Emeco Holdings boss Ian Testrow, who qualified for bonuses worth a combined $3.1 million after completing a three-way merger and recapitalisation of the equipment hire businesses.

Top individuals

In his final year as Wesfarmers chief executive, Mr Goyder was once again the state’s highest-paid person – a position he has held for most of the past decade.

Mr Goyder’s total income in FY17 was $12.1 million, up very substantially from the unusually low $5.5 million he earned in FY16, when the poor performance of several Wesfarmers’ business units dented his bonuses and equity incentives.

Messrs Coleman and Power, and South32’s Graham Kerr, continued to be among the state’s highest-paid executives, confirming the pattern that large companies deliver large incomes to their top executives.

Ian Testrow’s very large one-off bonuses lifted him up the rankings, with a total remuneration of $4.9 million placing him just behind Mineral Resources boss Chris Ellison.

As with previous years, the latest survey shows that the total remuneration of individuals is a very loose guide to how much money they actually get in their pocket.

Ken Brinsden, discussed above, is a prime example of a chief executive with a very large total remuneration but a modest cash salary (relative to the standards of his peers at his listed companies).

Compare that with Sandfire Resources boss Karl Simich, who had total remuneration of $1.9 million.

That includes a base salary of $1.1 million – risk-free money – topped up with cash bonuses and equity incentives.

Automotive Holdings Group chief executive John McConnell has a similar base salary, just above $1 million.

He earned a bonus of $500,000 in his first year in the job and, judging by the experience of his predecessor, is likely to double his base salary every year.

Another interesting example is Peet chief executive Brendan Gore.

His base salary is $917,685, which is arguably in line with market norms for a national land development business with a market cap of $730 million.

What makes Mr Gore stand apart from the pack is that, every year for the past four years, he has roughly tripled his base salary through cash bonuses and equity incentives.

In FY17, for instance, he was paid a bonus of $890,000 and earned equity incentives of $881,000, giving him total remuneration of $2.7 million.

That’s for a business that has delivered a total shareholder return of 12 per cent per annum over the past three years.

It meant for the fourth year running, Mr Gore was among the top 10 highest-paid chief executives in Perth.

Given there are at least 20 other listed companies in Perth with a higher market value, either Mr Gore is very generously remunerated or chief executives at the larger businesses are underpaid.

It must be noted, Mr Gore did not receive any cash bonuses in FY12 and FY13, when the business was not performing so well, but still had his base salary and equity incentives.

Another company worth a close look is NRW Holdings.

Previous surveys by Business News have shown that NRW chief executive Jules Pemberton is well paid relative to his peers in the contracting and construction sectors.

Like many other companies in that sector, NRW cut salaries to reflect the downturn in mining construction activity during 2014 and 2015.

Mr Pemberton’s base salary was cut from $1.35 million to $800,000 in January 2016.

In light of the company’s subsequent growth, including through the acquisition of east coast contractor Golding, NRW has chosen to lift Mr Pemberton’s salary to $950,000.

Getting incentives right

BDO Remuneration and Reward managing director Allan Feinberg expressed concern about the structure of many incentive schemes.

He has found that many chief executives, particularly at mid-cap companies, qualified for near maximum incentives, yet in many instances there was nothing extraordinary about their performance.

Mr Feinberg said incentives should be based on ‘hard deliverables’ that can be clearly measured, and questioned incentive schemes that included an array of non-financial measures.

“In many instances, non-financial measures have a primary focus on stakeholders rather than shareholders, such as health and safety and employee motivation,” he said.

Mr Feinberg said non-financial measures in many instances were more of an indicator that a company was fundamentally healthy and well managed for future sustainability.

Such measures therefore, should be utilised to determine whether the leadership team should qualify for their incentive and/or to mitigate their incentive, payout rather than being utilised as a basis for increasing variable pay.

“An incentive represents payment for above-average performance, not for doing your job,” he said.

Mr Feinberg also questioned the structure relating to long-term incentive schemes, with the vast majority linked to performance over a three-year period.

“That is not long-term in anyone’s view,” he said.

“Depending on company circumstances, this should be at least four to five years, however, if that was the case, many chief executives would not be around to collect on their incentive.”

An analysis by BDO Remuneration and Reward’s Information Business found that the average tenure of chief executives in the metals and mining industry was three years.

Mr Feinberg said, therefore, it should come as no surprise that many long-term incentives schemes represented three years.

He believes long-term incentive schemes should be better designed to attract, retain and motivate chief executives, to commit to their business for at least four to five years.

“If they bail before this, the scheme should hit their back-pocket hard; secondly, they need to have their own money on the line,” Mr Feinberg said.

“An option is not skin in the game, it’s just that, an option, a carrot, and if there is a better option out there, you’re at risk of losing that incumbent”.

He said a possible solution would be to defer a substantial part of the short-term incentive into equity such as Zero Exercise Price Options, attach a service condition to it, and restrict the incumbent from selling it once it vests.

Not only does this facilitate the meaningful accumulation of shares to participants, enforcing an ownership mentality, it had great retentive benefits and aligned their interests with those of shareholders.

“If you want to align thinking between shareholders and management, then management must be a shareholder,” Mr Feinberg said. 

It was important to note, however, that any incentive scheme needed to be based on the business’s requirements, and be customised to drive the company’s strategy.

Mr Feinberg said total shareholder returns (TSR) in a long-term incentive scheme worked well in deep markets such as the US, however in smaller markets such as Australia, relative TSR measures often included peer companies from different industries or with different risk profiles, and the results could be unintentionally misleading.

“This does not help the executive or the shareholder,” he said.

Secondly, the performance period of three years was a significant influencer in the misalignment of TSR schemes, and it may be argued that the incentive payouts, or lack thereof, were more heavily influenced by short to mid-term share price volatility rather than sustained long-term TSR performance, Mr Feinberg said.

“Three years is insufficient time to determine whether the executive team has really created sustainable shareholder wealth,” he said.

For smaller companies, Mr Feinberg said relative TSR could become even more of a lucky packet, as rankings measured over a short time period could be volatile and therefore, may bear little resemblance to actual performance.

This is particularly exacerbated for companies in the metals and mining industry that tend to have volatile share prices. In many instances, it makes sense to consider the progress made and the absolute level of performance attained.

Adjusting to the climate

Warren Land, who runs consulting firm The Reward Practice, drew similar conclusions from his analysis of ASX300 remuneration reports.

He believes mining companies must reassess traditional remuneration practices and adjust to the new business climate.

The Reward Practice director Warren Land

Mr Land found that chief executives in poorly performing non-mining companies got just 13 per cent of their potential short-term incentives.

In contrast, more than 70 per cent of reward incentives were paid to chief executives in poorly performing companies in the metals and mining sector, even though companies in this group had an average shareholder return of minus 21 per cent.

Mr Land said these incentives were largely based on ‘hygiene’ measures such as environment, company culture and safety, which did not underpin business growth.

“The industry is less likely to include a profit gateway, which means rewards can be achieved regardless of the company’s financial performance or position,” he said.

Mr Land said mining companies should give more weight to medium and long-term targets to recognise the volatility of project capital expenditure and the need to replenish reserves.

“Certainly a more appropriate and balanced approach is required moving forward,” Mr Land concluded.

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