CEOs’ value in the aye of shareholders

Five years of WA salary surveys show some chief executives appear to be remarkably well paid relative to the size of their business and the returns they have delivered, while others offer great value for money.

EVERY year for the past five years, Minara Resources managing director Peter Johnston’s base salary of more than $1.4 million has made him one of the best-paid executives in the state.

Add in annual bonuses and Mr Johnston was paid a total cash income over the past five years of nearly $10 million.

Very few WA chief executives have earned that much, yet Minara’s market value at June 30 was a modest $870 million and its total shareholder return over five years was less than 1 per cent per annum.

How does that figure?

It’s a similar story at engineering contractor Macmahon Holdings. Its chief executive, Nick Bowen, also ranks as one of the highest earners over the past five years.

His base salary has averaged a little over $1 million per year and he has been paid bonuses of $3 million.

Yet during the same period Macmahon has delivered a patchy profit performance and a TSR of minus 3.3 per cent.

Messrs Johnston and Bowen are part of a relatively small group of WA chief executives who held their jobs for the five years to June 2011.

This period provides a good basis for analysing their value for money. 

For the purposes of this analysis, equity incentives such as share options are ignored; instead the focus is on cash salary and cash bonuses.

We ask the simple question: why were some chief executives consistently very well paid over the past five years when they ran relatively small companies and delivered modest, or even negative, returns to shareholders?

Uranium miner Paladin Energy is another stock where there appears to be a mismatch.

Its TSR for the past five years was minus 9 per cent per annum, leaving it with a market value of $1.9 billion.

Yet chief executive John Borshoff had a total cash income over that period of $10.4 million.

A fourth example, though not quite as stark, is Automotive Holdings Group. Its chief executive, Bronte Howson, has been consistently well paid over the past five years, with salaries and bonuses adding up to $8.7 million, even though AHG has been, at best, a middling performer.

The four executives listed above are not a random selection. WA Business News has been able to identify only three executives who earned more over the past five years – Wesfarmers’ Richard Goyder, Woodside’s Don Voelte and Rio Tinto’s Sam Walsh – and they are a special case, because they run three of the state’s largest businesses.

While shareholders at Paladin, Macmahon, Minara and AHG would be entitled to ask some tough questions about their remuneration policies, shareholders at several other companies should be giving their long-serving chief executives a pat on the back.

Take Mermaid Marine, which operates a supply base at Dampier and has a fleet of vessels for servicing the offshore oil and gas sector.

Over the past five years, Mermaid Marine has been one of the state’s best-performing stocks, with a TSR of 42 per cent per annum.

That lifted its market value to $687 million, higher than for Macmahon and AHG and not far behind Minara.

Yet chief executive Jeff Weber’s total cash income over this period was a modest $4.1 million.

Engineering contractor Monadelphous has been another top performer, delivering higher profits every year for the past decade. It has grown to be one of WA’s top 10 stocks by market value and was recently added to the S&P/ASX 100 stocks index.

Long-serving chief executive Rob Velletri has had a few pay rises, yet his total cash income over the past five years was also a modest $4.1 million – less than half Nick Bowen’s total income.

It’s a similar story at Western Areas, which has outperformed fellow nickel miner Minara Resources over the past five years. Its recently retired chief, Julian Hanna, was paid just $3.3 million over that period, about a third of Peter Johnston’s total cash income.

Internet services business iiNet has also been a great stock for shareholders, with a five-year TSR of 36 per cent per annum. That lifted its market cap to about $400 million, putting it on a par with Macmahon.

Yet its founder and chief executive, Michael Malone, who was recently named the Ernst & Young national Entrepreneur of the Year, had a total cash income of just $2.3 million.

Alignment

The professed goal of corporate remuneration policies is to align the interests of shareholders and executives; clearly that has not happened at all of these companies.

The best way to make sense of these outcomes is to look backwards, and study the history of these businesses.

Paladin Energy, for instance, was one of the state’s top stocks during the ‘noughties’, as it went from being a penny dreadful explorer to the world’s first major new independent uranium miner. 

Mr Borshoff was modestly paid for much of that period, though he did profit handsomely from share options.

As the company entered production, and grew to be one of the state’s top half-dozen companies by market cap, Mr Borshoff’s salary started rising.

The problem is that production setbacks and weak uranium prices have stopped the company delivering the expected profits.

Mr Johnston’s lucrative stint at Minara – he left recently after it became a wholly owned subsidiary of Glencore International – is best explained by looking at the circumstances of his recruitment.

He joined the company in 2001, when it was still known as Anaconda Nickel and in the midst of corporate upheaval and chronic operational problems; clearly it had to offer an appealing package to lure him away from a career with blue chip miner WMC Resources.

AHG’s remuneration practices seem to reflect the adage that it’s all about the size of the business.

With national operations in automotive sales and logistics and annual turnover of $3.3 billion, AHG is one of the state’s largest businesses. As noted above, however, it has been a middling performer in terms of shareholder returns.

A single line in Macmahon’s annual report helps to explain Mr Bowen’s high income.

It states that the current remuneration policy includes “fixed remuneration at above industry median” to attract and retain executives.

It also states that the annual cash bonus opportunity should be high as a percentage of fixed remuneration for the chief executive (one to one and a half times salary).

Judging by payments over the past five years, Macmahon has put these policies into practice.