Special Report - Value for money the CEO test

In Western Australia’s most comprehensive executive salary survey, Mark Beyer looks behind the headline numbers to find the State’s best value chief executives.

The chief executives of Western Australia’s top 50 companies lifted their base pay by an average of 21 per cent last financial year, well above the 3-4 per cent rise in average earnings.

A majority of chief executives also received profit bonuses and share options that substantially boosted their total remuneration.

WA Business News’s annual salary survey to find WA’s best-value CEO revealed that million-dollar incomes have become the norm at the State’s 10 biggest companies (see page 17).

Four companies – Wesfarmers, Minara Resources, Foodland and Great Southern Plantations – went one better, paying more than $2 million to their chief executives.

About half of WA’s top companies paid cash bonuses to their chief executives, with Great Southern Plantations’ John Young getting by far the biggest bonus of $1.4 million (see page 16).

Share option schemes – which typically give participating staff the right to buy shares at a discounted price – are also used by most companies, with the biggest winner being Minara Resources’ Peter Johnston.

Bonuses and option schemes are meant to increase the portion of income that is ‘at risk’.

In theory, the chief executive is rewarded only if the company performs and shareholders also gain.

In practice, this neat alignment of executives’ and shareholders’ interests doesn’t always apply.

WA Business News has looked behind the raw numbers to find the chief executives who delivered real ‘value for money’ for their share-holders last year.

This analysis has turned up six chief executives who cover nearly the full spectrum of personal income.

The resources sector is home to three of the best value chief executives – Hardman Resources’ recently retired managing director Ted Ellyard, Jubilee Mines’ Kerry Harmanis, and Equigold’s Nick Giorgetta.

They are joined by three other chief executives who delivered top results relative to their total income – Integrated’s Jon Whittle, Great Southern Plantations’ John Young, and Fleetwood’s Greg Tate.

The total incomes of this group ranged from Mr Whittle, who earned less than $220,000 last year, to Mr Young, who earned more than $2 million.

But looking at total income on its own is meaningless.

The six chief executives selected by WA Business News have been ranked on four key measures.

Most important, their companies have consistently delivered top returns to shareholders, via share price growth or dividend income.

Hardman Resources, for instance, whose main asset is minority interest in a developing oil field in West Africa, has returned 112.4 per cent a year over the past five years.

This made it the best performing WA stock in the annual WA Business News TRUDO total shareholder return survey.

The six chief executives also delivered higher profits last year.

Mr Ellyard headed the field on two specific measures.

His total income of $562,447 was equivalent to just 0.62 per cent of Hardman’s net profit, which admittedly reflected large one-off gains from the sale of oil and gas interests in Africa.

Mr Ellyard also topped a second measure; his base income of $326,247 was just 0.03 per cent of Hardman’s market capitalisation at June 30.

Jubilee’s Mr Harmanis has also provided extremely good value for money for his shareholders.

Helped by higher nickel prices and increased production, Jubilee nearly doubled net profit to $95.1 million last year.

Mr Harmanis’s total income of $607,864 was equivalent to just 0.63 per cent of Jubilee’s net profit.

To put this in perspective, Macmahon Holdings managing director Nick Bowen’s total income last year of $816,036 was equivalent to 7.1 per cent of net profit.

Mr Harmanis also ranked highly because his base income of $568,281 was equal to just 0.11 per cent of Jubilee’s market cap.

Integrated’s Jon Whittle is one of the quiet achievers in Western Australian business. He established Integrated as a labour hire firm in 1992, floated the company in 1999 and has since diversified into a range of industrial services, in the process lifting net profit to $11.8 million.

His pay was almost doubled when Integrated floated, yet he still takes home a modest pay packet relative to other listed companies.

His total income of $219,485 was the third lowest level among WA’s top 50 stocks but Mr Whittle certainly isn’t complaining.

“I think I’m well remunerated,” he told WA Business News.

Interestingly, some of Mr Whittle’s staff take home a bigger pay packet than the boss, and he thinks that is just fine.

“They are down at the coalface creating the business opportunities,” Mr Whittle said. “You have to pay people what it takes to get the job done.”

Equigold managing director Nick Giorgetta is another quiet achiever on a relatively modest income of $359,700.

Equigold is unusual in having a policy of not paying performance-based bonuses to any of its executive staff. The gold miner had another good year in 2004, lifting gold output for the fifth consecutive year and net profit for the seventh consecutive year.

Great Southern Plantations’ John Young is at the other end of the pay scale, yet he still ranks as a ‘good value’ chief executive, according to WA Business News’s analysis.

His total income of $2.1 million is equivalent to 2.3 per cent of Great Southern’s net profit, which more than doubled last year, while his base income is equal to 0.11 per cent of the company’s market cap.

Caravan and park homes manufacturer Fleetwood has been a remarkably consistent performer, lifting profit and dividends year after year for the past decade.

Chief executive Greg Tate’s total income of $622,068 was equivalent to 3.1 per cent of Fleetwood’s net profit, not as low as some other chief executives but nonetheless lower than most.

Dividend and salary option for CEOs

Many Western Australian companies are in the unusual situation of having a chief executive who is also a major shareholder.

It means the chief executive may take home a big dividend cheque as well as their salary and other remuneration.

Jubilee Mines executive chairman Kerry Harmanis is one of the few who acknowledges that his shareholding does and should affect his remuneration.

“It makes a difference to my thinking,” Mr Harmanis said.

“I choose to remain on a modest salary and take my return through dividends like all the other shareholders.”

Mr Harmanis’s total remuneration of $607,864, which has remained largely unchanged for the past three years, pales next to his annual dividends of about $10 million.

Great Southern Plantations managing director John Young also receives big dividend cheques from his company, totalling more than $5 million last year.

He has also benefited from higher remuneration, with a 12 per cent rise in his base income to $741,559 and cash bonuses of $1.4 million.

Integrated’s Jon Whittle is another chief executive with a major shareholding in his company, though his dividends are modest compared with those of Messrs Harmanis and Young. He is firmly of the view that dividend income should not affect remuneration.

“The chief executive should get paid what he’s worth. His income should be related to performance.”

Harvey Norman chief executive Gerry Harvey, who receives large dividends as the major shareholder in one of Australia’s biggest companies, has traditionally had a very modest cash income.