Chief executives' pay up big time

The chief executives at Western Australia’s biggest companies enjoyed a large increase in total income during the past financial year, helped by big cash bonuses and valuable share options.

The base income of chief executives at the state’s top 50 companies increased by a surprisingly modest 6.3 per cent, just ahead of average wages growth.

However, when bonuses and share options were added in, their total income jumped by 37 per cent.

The averages disguise wide variations within the group, with some chief executives doubling or even tripling their income while a handful suffered a pay cut.

The generally big increases reflect the buoyant state of the economy and the boom in commodity prices, which have flowed through to company profits.

The survey has highlighted the close correlation between the size of a company and the size of its chief executive’s pay packet.

This is logical given the increased complexity and challenges involved in running a large business.

Big companies also have a greater proclivity to pay big bonuses and to issue large numbers of share options.

Hence, chief executives like Wesfarmers’ recently retired Michael Chaney, Foodland Associated’s Trevor Coates and West Australian News-papers’ Ian Law sit near the top of the list.

There are some fascinating exceptions to this pattern, with chief executives at several smaller com-panies earning surprisingly large incomes.

Mt Gibson Iron’s Brian Johnson earned a total of $2.2 million, Gallery Gold’s Hamish Bohannan earned $1.7 million, and St Barbara Mines’ Ed Eshuys earned $1.5 million.

The biotech sector was also a surprise, with pSivida’s Gavin Rezos, Regenera’s William Ardrey and Stirling Products’ Murray Ward all earning in excess of $1 million (see page 21).

These people were among the 37 WA executives who earned more than $1 million (see page 17).

Chief executive pay has come under more scrutiny than ever before this year, following the federal government’s decision to give shareholders a non-binding vote on their company’s remuneration report.

The activist role of shareholders was highlighted by the recent controversy surrounding Consolidated Minerals’ highly regarded managing director, Michael Kiernan.

Institutional investors objected to a share option scheme that could have delivered benefits worth $20 million to Mr Kiernan, depending on the company’s share price.

ConsMin responded by withdrawing the proposal and Mr Kiernan subsequently chose to leave the company.

To properly understand trends in executive remuneration, it is necessary to look beyond the headline number and analyse the components of each chief executive’s total income.

This can be illustrated by looking at three chief executives who earned about the same amount last year.

Wesfarmers’ executive Richard Goyder, Great Southern Plantations’ managing director John Young and Gallery Gold’s Hamish Bohannan all earned roughly $1.7 million, but that is where the similarities end.

For Mr Goyder, who succeeded Mr Chaney as chief executive in July, most of his remuneration was in the form of his base income of $1.4 million.

Mr Young had a lower base income of $962,244 but received a mammoth $800,000 cash bonus.

Mr Bohannan had a relatively low base income ($324,230) and a small bonus but rocketed up the rankings because he was issued with share options worth $1.4 million.

With so many differences between packages it can be difficult to judge who provides the best value for money.

Aspiring iron ore miner Fortescue Metals Group’s chief executive Andrew Forrest appears at first glance to offer remarkably good value.

He has driven very strong growth in FMG’s share price over the past two years, to the point where it is one of WA’s top 20 stocks by market capitalisation, yet he draws an annual salary of just $110,000.

However, Mr Forrest has also benefited significantly from share options granted about the time he took control of FMG.

He exercised most of his options in January, when he bought 63.8 million shares at eight cents per share, for a total cost of $5.1 million.

One month later he was able to sell three million shares on-market at $4.50 per share, for total proceeds of $13.5 million.This illustrates the enormous gains that can be made by chief executives who are awarded share options and are able to drive their company’s share price higher.

Another chief executive with an unusually modest income is iiNet’s Michael Malone, who took home $272,906 last year.

That’s a big increase from the $195,000 he earned in 2004 but is small for a company of iiNet’s size and is less than the incomes of some of his senior staff.

The big gain for Mr Malone comes from his 16.5 per cent shareholding, which is currently worth about $50 million and generated total dividends last year of $1.2 million.

Among the high income earners, Alinta managing director Bob Browning also has a modest income relative to the size of the company.

Alinta has enjoyed rapid national growth over the recent years and is currently WA’s fourth biggest company by market capitalisation, yet his base income of $671,000 was exceeded by 10 other WA chief executives.

Mr Browning’s total income was boosted by $986,000 in bonuses, which took his total income to $1.7 million.

The salary survey revealed big pay increases at companies that have achieved major milestones, such as mining companies that have established new projects.

A prime example is Paladin Resources, which spent many years as a struggling explorer but is now developing a uranium mine in Africa.

In 2004, managing director John Borshoff had a base income of just $27,250, plus his private company was paid $102,000 for geological and consulting services.

In 2005, his base income jumped to about $70,000, he was granted options worth nearly $346,000 and his private company was paid $212,000.

In March this year, Paladin negotiated a new three-year service agreement with Mr Borshoff that takes his base salary to $400,000.

Like many exploration and technology companies that are still at the evaluation and development stage of their activities, and which are incurring losses, Paladin says its remuneration policy does not focus on its earnings.

Another company that awarded big pay increases was Mount Gibson Iron, which produces iron ore in the Mid-West and is progressing plans for much bigger mining and steel projects.

Former managing director Brian Johnson, who stepped down from the top job last month, was awarded a 50 per cent increase in his base income to nearly $433,000.

Mr Johnson also was paid a bonus of $250,000 last year (nil previously) and was granted options valued at $1.5 million ($155,000 previously).

In January 2005 he negotiated a new contract that took his base income to $500,000.

An interesting sidelight is the way in which Mr Johnson chose to receive his base income.

The non-cash benefits included a motor vehicle, accommodation and, most unusually, airfares to his home in NSW.

Mr Johnson stepped down from the managing director’s job in October to take charge of the company’s Extension Hill magnetite mine and its Longtan pellet plant in China.

His successor, Luke Tonkin, has a similar package, with a base income of $500,000, an annual bonus up to 20 per cent of the salary, and five million share options with various terms.

Sally Malay Mining awarded big pay increases following the start of production at its nickel mine in the Kimberley.

Managing director Peter Harold was awarded a 17 per cent increase to $311,200 and also received a bigger cash bonus ($50,000) and share options valued at $543,000.

Mr Harold wasn’t the only beneficiary, with other executives also given big pay increases.

The recruitment of a new managing director is another event that can trigger a substantial pay increase.

For instance, Perilya recruited Len Jubber in May. His package comprises a base salary of $475,000 plus superannuation, a bonus of up to 16 per cent of salary, and five million options.

His predecessor, Tim Clifton, earned a total of $339,000 in 2004.

Another company that awarded a big pay increase to its new managing director was Hardman Resources, whose main asset is a stake in Woodside’s Chinguetti oil project in west Africa.

Simon Potter’s five-year contract includes a $700,000 base salary, plus options, plus an annual bonus of up to 50 per cent of his base salary.

He will also participate in a long-term incentive scheme and may qualify for sign-on and loyalty incentives to be paid in cash and based on movements in the company’s share price.

His predecessor, Ted Ellyard, had a base income of $326,000 and was awarded share options worth $236,000 in 2004.