Ongoing economic uncertainty mirrored in local executives’ remuneration

Tougher economic times and increased scrutiny have put a cap on the growth of executive remuneration.

THE number of salaried millionaires working for public companies in Perth has become a useful barometer of business conditions in Western Australia.

There were 101 executives in Perth with a total income of more than $ 1 million last financial year, WA Business News' 10th annual salary survey has found.

That is down from 120 in the 2011 survey, when resources boom II was in full flight.

The latest figure is on a par with the results of the 2008 salary survey, when Perth had exactly 100 company executives earning $1 million or more.

With uncertainty surrounding the economic and commercial outlook, local business executives will be hoping there is no repeat of the 2009 salary survey. In that year, the dramatic impact of the GFC led to a drop in the number of salaried millionaires in Perth to 58.

The 2012 survey comes at a time of unprecedented scrutiny of executive remuneration, fuelled by the ability of company shareholders to vote against remuneration reports.

The risk of incurring ‘two strikes’, and having to face the possibility of a vote on a board spill, has added to the concerns facing company directors.

However this scrutiny has not halted some very large increases in remuneration at the big end of town.

Two Perth-based executives had total remuneration of more than $8 million last financial year, and a third executive wasn’t far behind.

Yet the individual cases involved show that contemporary accounting standards do not always produce meaningful disclosure.

Perth’s highest paid executive last year wasn’t even a chief executive; it was Fortescue Metals Group’s director operations Peter Meurs, who had total remuneration of $8.2 million.

However, most of that total - $7 million to be precise - came from the valuation of his longterm equity incentives.

The Wesfarmers crew

Aside from Mr Meurs, the state’s high-est-paid executive last financial year was Wesfarmers managing director Richard Goyder, whose remuneration totalled $8 million, up from $6.9 million previously.

For the second year running, Mr Goyder’s base salary ($3.3 million) was also the highest in the state, as was his annual bonus ($2.1 million).

That outcome was not surprising, given Wesfarmers’ status as WA’s largest company, its ranking as one of Australia’s top 10 companies, and its growing profits.

The WA Business News salary survey is focused on Perth-based executives, and therefore excluded most of the Wesfarmers management team.

Most notably, this included Coles division managing director Ian McLeod, who continued to far outstrip the earnings of his boss.

Mr McLeod’s total income last year was $14.8 million, making him Australia’s highest-paid executive. Most of his income ($10.9 million) was in the form of share-based payments.

All of Wesfarmers’ senior management group would have ranked highly in the salary survey, if they were based in Perth. As it was, only Mr Goyder and finance director Terry Bowen were included.

Outside of Wesfarmers, other big earners last year included: Rio Tinto executive director Sam Walsh ($7.7 million); Iluka Resources boss David Robb ($5.1 million); Woodside managing director Peter Coleman ($3.9 million); and Seven Group Holdings chief executive Peter Gammell ($3.8 million).

Pay restraint

A notable development last year was the gesture by some chief executives to share the pain being felt by their shareholders.

BHP Billiton managing director Marius Kloppers, his Rio Tinto counterpart Tom Albanese, and Qantas chief executive Alan Joyce all waived their bonus entitlements last financial year, after their companies were hit by big write-downs and weak earnings.

The ANZ and Commonwealth banks instituted a salary freeze for their top executives.

Closer to home, Paladin Energy managing director John Borshoff accepted a 25 per cent salary reduction, from December 12011 and extending until June 30 2013.

VDM Group managing director Andrew Broad offered a 12 per cent salary reduction as part of the cost-saving measures taken by the company, while newly appointed Macmahon Holdings managing director Ross Carroll accepted a 10 per cent salary reduction.

In the property sector, Peet managing director Brendan Gore and his top executives agreed to forego their bonuses for the 2012 financial year and accepted a pay freeze for the 2013 financial year.

Global Construction Services managing director Enzo Gullotti and his top executives also accepted a pay freeze for FY13, but with a twist.

The company agreed in August to pay Mr Gullotti a one-off re-signing incentive of $50,000 for the extension of his contract, while the top executives got a $35,000 re-signing incentive.

Advisory group ISS believes that CEO-initiated pay restraint is ultimately unsustainable.

“For one, it relies on the benevolence of the executive,” ISS said in a recent research note.

“Additionally, it subverts the authority of the remuneration committee and ultimately the board.”

ISS believes this practice reveals a structural weakness in short-term incentive schemes.

“Company performance should align with pay outcomes and in such a way that an executive should not have to decline a bonus in the first place,” ISS said.

Where this does occur, ISS said the remuneration committee should determine what aspect of the incentive scheme caused the disconnect.

$1m club

The restraint exercised by some companies was not applied across the board.

WA Business News' survey found there were 16 Perth-based company executives with a base salary of $1 million or more last financial year.

That was up from 12 in the previous year.

The list included NRW Holdings managing director Jules Pemberton, Atlas Iron executive chairman David Flanagan, and Sandfire Resources managing director Karl Simich.

The survey also found eight Perth executives who were paid an annual bonus of $1 million or more, up from just three in the previous year.

With one exception, all of the people who earned a $1 million-plus annual bonus also had a base salary of $1 million or more.

Murchison largesse

One company that ranked surprisingly high on the salary survey was Murchison Metals, which is effectively being wound up after selling its interest in Oakajee Port and Rail and the Jack Hills iron ore project.

The ‘old guard’ who ran the business up until early this year benefitted from lucrative cash bonuses, termination benefits and options deals.

The biggest winner was former chief executive Trevor Matthews, who left the company in February after being paid a salary of $354,000, a cash bonus of $1.2 million, share options also worth $1.2 million and termination benefits of $650,000.

Four other former executives also left early this year with cash bonuses of $300,000 each and total remuneration of more than $1 million.

Former managing director Paul Kopejtka was not forgotten, getting a $547,000 termination benefit.

The ‘new guard’, led by chairman Ken Scott-Mackenzie and managing director Greg Martin, was also well rewarded for its time at the company.

Mr Martin had a total income last year of $3.1 million, including a base salary of $1.4 million and a cash bonus of $1.6 million.

Mr Scott-Mackenzie earned a total income of $407,000, making him one of the better-paid chairmen in Perth. He also earned $247,000 as chairman of Macmahon Holdings.

Board control of Murchison recently passed to Sir Ron Brierley’s Mercantile Investment Co, which had argued that the company was spending too much as it proceeded with returning cash to shareholders.

Mr Scott-Mackenzie rejected this charge but agreed to step aside after Mercantile said it shared his desire to return cash to shareholders.