Wesfarmers cancels cash bonus

Wesfarmers broke with widely accepted industry practice when it negotiated the salary package for its new chief executive Richard Goyder earlier this year.

Mr Goyder’s employment contract has no fixed term and contains no short-term incentive.

Wesfarmers’ board said it took this approach because it believes the chief executive should be judged and rewarded based on performance over an extended period.

The package for Mr Goyder will comprise two elements – a fixed salary of $2.25 million and participation in a share purchase plan.

Wesfarmers chairman Trevor Eastwood said that, “given good performance”, the amount available under the share plan would be similar to the fixed salary, giving Mr Goyder a total remuneration of about $4.5 million.

In contrast to Wesfarmers, the vast majority of companies continue to pay, or at least have the capacity to pay, both short-term and long-term incentives to their chief executives.

In most cases, the main debating point is the cap that should be placed on the short-term incentive, which is usually in the form of a cash bonus and subject to meeting performance targets.

At one end of the spectrum is mining company Perilya.

The annual bonus payment to its chief executive Len Jubber is capped at 16 per cent of his base salary, which is $475,000.

Mr Jubber’s long-term incentive, in the form of five million share options, is likely to be much more lucrative.

At the other end of the spectrum is stock broking firm Euroz, which calculates cash incentives on 30 per cent of pre-tax profit.

Its annual report disclosed that half a dozen executives, including chairman Peter Diamond and managing director Andrew Mackenzie, earned $544,000 bonuses, which more than doubled their base salary.

Agribusiness company Futuris has taken the opposite stance to Wes-farmers.

It recently amended chief executive Les Wozniczka’s remuneration so the short-term incentive can be up to 150 per cent (previously 100 per cent) of his base income of $1.2 million.

However, Mr Wozniczka is now required to take half of any short-term incentive in the form of Futuris shares (previously nil), which are subject to a three-year lock.

Between these extremes are many variations.

Companies including Foodland Associated, Great Southern Plantations, Consolidated Minerals and Macmahon Holdings pay annual cash bonuses up to 100 per cent of base income, though the details vary significantly.

At Foodland, the annual bonus for chief executive Trevor Coates can range from 50 per cent of base salary if all performance targets are met to a maximum of 100 per cent for above-target achievement.

His 2005 bonus of $1.1 million was the biggest bonus paid to any chief executive in WA.

Macmahon has a similar policy, with managing director Nick Bowen’s annual bonus based on safety, earnings per share, order book levels and return on capital performance.

Consolidated Minerals caps its short-term bonus at 100 per cent of base salary, and Great Southern Plantations has the same policy though in practice it takes a flexible approach to its implementation.

In 2004, chairman John Young received a cash bonus of $1.4 million and other executives earned cash bonuses that were double their base income.

In 2005, bonuses ranged from 80 per cent to 120 per cent of base remuneration, with the latter amount reflecting “exceptional” performance.

Woodside managing director Don Voelte’s short-term bonus can be up to 62.5 per cent of his base income, while Western Australian Newspapers managing director Ian Law can earn a bonus of up to 90 per cent of his base salary of $1.1 million.

Chemeq’s newly appointed chief executive, David Williams, can receive a short-term cash bonus of up to $100,000, which would equate to one quarter of his base salary.

Nickel miner Minara Resources pays annual cash bonuses worth up to 30 per cent of the base salary of its senior executives.

Orbital Corp’s new managing director, Rod Houston, can receive annual cash bonuses of up to 40 per cent of his base salary of $270,000.

Oil and gas company Hardman Resources and struggling wine producer Evans & Tate both pay cash bonuses up to 50 per cent of base salary.

Cash bonuses are normally calculated in one of two ways.

Many companies base them on specific performance targets, including production, safety, earnings and return on capital.

An alternative approach is to link bonuses to total shareholder return (i.e. share price growth plus dividends plus any capital returns).

Independence Group managing director Chris Bonwick qualified for a $50,000 bonus in 2005 because his company’s TSR exceeded the average TSR of a peer group of companies, comprising Jubilee Mines, LionOre Mining International, Mincor Resources and Tectonic Resources.