Two of Western Australia’s biggest companies, Woodside Petroleum Ltd and Iluka Resources Ltd, have adopted major changes to their executive remuneration schemes to provide more effective incentives.
Woodside announced last week that it would simplify its incentive plan, while Iluka intends to introduce a new scheme that focuses on return on equity as the key performance measure.
The Woodside scheme has for the past two years used the concept of ‘economic value added’ as the principal measure of performance.
Chairman Charles Goode told last week’s annual meeting that employees found EVA to be a difficult concept to understand.
“As a result, the effect of the plans in motivating our people is diluted,” Mr Goode said.
He added that the board has needed to exercise “considerable discretion” to ensure Woodside’s remuneration reflected market trends – code for saying Woodside has granted big pay increases.
In the current year, Woodside said it would base its short-term incentives on four performance measures – safety, production, operating expenditure and the company’s total shareholder return (which comprises share price growth, dividend payments and any other returns) relative to a peer group of international oil and gas companies.
Its TSR would also form the basis for its long-term incentive scheme.
“We believe this simplified framework will provide greater clarity and motivation for all our employees, continue to challenge our executives to lift their performance and ensure the executive incentive plan is aligned with the expectations of shareholders,” Mr Goode said.
Iluka, led by managing director David Robb, is revising its incentive scheme following criticism that it lacked a clear long-term component and comparative performance measures.
Its short-term incentive plan will be based primarily on financial performance, in particular return on equity, but will also take account of growth targets and safety and environmental measures.
Its long-term incentive plan will be based on two metrics – return on equity relative to an internal target, and TSR relative to a comparator group of companies.
Iluka said the maximum incentive payable to its staff will increase from 90 per cent to 110 per cent of each executive’s base salary. Under the Iluka scheme, participating staff must split their incentive payments equally between cash and deferred share rights.