As the annual general meeting season for Australia’s public companies gets underway, executives and directors are bracing for a barrage of criticism from angry investors over high pay and bonuses.
As the annual general meeting season for Australia’s public companies gets underway, executives and directors are bracing for a barrage of criticism from angry investors over high pay and bonuses.
While investors have taken some big losses as a result of the credit crunch, the recent release of a number of annual reports from big companies indicates executives haven’t quite felt the same level of pain.
The chief executive of Qantas, Geoff Dixon received $5.54 million in fixed remuneration for 2007-08, up from $5.35 million the previous years. In the past 12 months, the airline’s shares have sunk 44%, compared with a fall of about 30% for the entire market.
Over at media company Fairfax Media, chief executive David Kirk received total remuneration that rose 24% from $2.76 million to $3.41 million. Fairfax’s shares have slipped 46% in the last 12 months.
Boards are playing a few other little tricks to ensure executives don’t miss out on their money. Some companies have started paying “retention” payments to make up for missed bonuses, while others are tweaking incentive hurdles to keep top managers happy.
A good example of this is property company Valad, which has changed its long-term incentive criteria markedly. In 2006-07, executives had to meet financial targets, and “included the achievement of growth in earnings per security and total security holder return targets set by the board”, according to the company’s annual report. Fast-forward 12 months and “the only vesting criteria for long-term incentives granted in 2008 is remaining in employment with the group for two and three years”.
Dean Paatsch from corporate governance group RiskMetrics told The Australian that institutional investors were closely monitoring this type of behaviour.
“Executive compensation is not about compensating executives when at-risk pay fails to deliver. Institutions are looking very poorly at contrived retention grants,” he says.
Michael Robinson, co-founder and executive director of remuneration consultants Guerdon Associates, says boards need to tread very carefully around the issue of retrospectively changing performance hurdles in order to retain an executive, not least because doing so can bring forward employment expenses that will hit the company’s bottom line.
“They need to consider whether by changing the hurdles, are they still going to meet or exceed shareholder expectations?” Robinson says.
There may be some reason for a retention payment in a falling market. He gives the example of an executive who has clearly outperformed his competitors but his bonus is tied to shareholder return criteria (a common measure is dividends plus share price increase) that are impossible to meet as all stocks are sold off.
“There’s a rationale there for retaining that individual, but I wouldn’t be changing incentive hurdles. I’d be paying a discretionary bonus to make sure that person stays,” he says. “If there’s a good rationale, the payment should stand up. If it’s weak or absent, shareholders certainly have good reason to complain.”
Robinson says retention payments for mediocre executives will be almost impossible to justify. “Anyway, in a downturn, where are they going to go to?”
Chris Costello, managing director of remuneration consultant RPC Group, says shareholders also need to watch the granting of new options for executives.
“I think in general there is a big opportunity for executives to make a fortune out of the crash and for shareholders to get fleeced.”
He gives the example of an executive at a company where shares have sunk from $50 to $25. The board might issue 500,000 options at $30, with a strike price of $50. When the market turns, the executives cash in. “If they can get the shares back to $50, these executives can make $20 each on 500,000 options. They’ll make $10 million out of taking the share price back to where it was six months ago.”
Costello says option plans need to have multiple hurdles, including executives out-performing their competitive group and the overall sharemarket.
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