Executive remuneration is a hot political issue but the controversy does not seem to have slowed growth in pay packets at WA companies.
Executive remuneration is a hot political issue but the controversy does not seem to have slowed growth in pay packets at WA companies.
The Eurozone may be on the brink of collapse and the United States may be in the doldrums, but the good times seem to have continued unabated in Western Australia.
With the state enjoying strong economic growth and investment in major resources and infrastructure projects at record levels, the prosperity has flowed through to executive incomes.
That is one of the major findings of WA Business News’ ninth annual executive remuneration survey, which shows that incomes at the top end of town are on the rise.
This year’s survey of ASX-listed companies found that more than 120 executives and directors working in Perth earned total incomes, including bonuses and share options, of more than $1 million.
That’s up from 76 in the 2010 survey and 58 in the 2009 survey.
The state’s rapid and strong emergence from the global financial crisis helps to explain this pattern, a conclusion reinforced by earlier data.
In the 2008 survey, the state had nearly 100 directors and executives with total remuneration of more than $1 million. In 2007 there were 79 earning that much.
Of all the Perth-based executives in the survey, the highest earner last financial year was outgoing Woodside managing director Don Voelte. With a base salary of $2.6 million, an annual bonus of $1.7 million and equity incentives valued at $3.4 million, his total remuneration was $7.9 million.
Other high earners included Rio Tinto Iron Ore boss Sam Walsh on $7.6 million and Wesfarmers managing director Richard Goyder on $6.9 million.
Notably, Mr Goyder’s total income was eclipsed by one of his staff – Melbourne-based Coles managing director Ian McLeod had a total income of $15.6 million.
If Mr McLeod continues to deliver an improved performance at Coles, he will continue to receive an annual income around that level for the remainder of his five-year contract.
Another surprise this year was the second-highest earner in Perth – Fortescue Metals Group’s director of developments, Peter Meurs, had total remuneration of $7.7 million.
His high ranking illustrated one of the most contentious aspects of remuneration reports.
The bulk of his reported remuneration ($5.8 million) was in the form of share options.
Calculating the fair value of options is a highly inexact science. FMG uses a “tri-nomial lattice” pricing model that includes eight variables, other companies use alternative formulas.
History tells us the value Mr Meurs ends up deriving from his share options will be a lot more, or a lot less, than the estimate included in this year’s annual report.
The same applies to anybody else who is awarded share options, which are typically used to provide a long-term incentive – particularly at cash-strapped exploration companies that can’t afford to pay high salaries but want to offer incentives to their executives.
A prime example is Elemental Minerals, which awarded share options valued at $3.6 million each to managing director John Macpherson and executive director John Sanders.
As a result, they were among the 10 highest-paid executives in the state last year, even though their cash salary was a relatively small $259,000 each.
Given the distorting impact of share options, it’s instructive to look at just the cash income paid each year to the state’s top executives.
Wesfarmers’ Mr Goyder had both the highest base salary ($3.1 million) and the highest annual bonus ($2 million) last financial year (see attached table).
The largest salaries tend to be paid at the largest companies, a trend confirmed by an analysis of the remuneration packages of newly appointed chief executives, such as Woodside’s Peter Coleman (see Sign-on fee adds zeros to base plus bonus).
There are exceptions to this pattern. Minara Resources’ Peter Johnston (until the company’s recent takeover) and Macmahon Holdings’ Nick Bowen are among the state’s highest-paid chief executives, and have been consistently very well paid for at least the past five years.
However, their incomes are not commensurate with the size of their business or the returns they have delivered to shareholders. They are in stark contrast to chief executives like Mermaid Marine’s Jeff Weber and iiNet’s Michael Malone, who have delivered much better value for money over the past five years (see CEOs' value in the aye of shareholders).
Notably, Mr Bowen chose to forego a $371,000 bonus this year “having regard to the financial performance of the company”, which reported a net profit of just $1 million and scrapped its dividend.
He still took home an annual salary of $1.2 million, the eighth highest in the state.
The debate over executive remuneration always comes to a head during the annual meeting season, when shareholders are given an opportunity to vote on remuneration reports. There has been added spice in the debate this year, following passage of the federal government’s ‘two strikes’ legislation.
If 25 per cent of voting shareholders oppose a remuneration report in two successive years, the company is required to have a board spill.
So far, about 50 companies nationally have recorded ‘strike one’.
This includes more than half a dozen in WA, such as Automotive Holdings Group, Emeco Holdings, Fleetwood Corporation, Aspen Group, Diploma Group, Heron Resources and Paynes Find Gold.
However, voting on remuneration reports seems to be a very unreliable guide as to the real issues at each company.
In several cases, such as Diploma and Heron, the vast majority of shareholders abstained from voting.
In other cases, such as Aspen Group, companies have recorded a ‘strike’ even though specialist advisory groups CGI Glass Lewis, ISS Proxy Services and Ownership Matters, which review remuneration practices, have unanimously recommended a yes vote.
One of the most curious cases is automotive group AHG. It recorded a very high 44 per cent no vote, even though this year’s remuneration report was essentially the same as last year’s, which attracted a 99 per cent yes vote.
The real reason for the high no vote appears to lie with a dispute between the board and the Wheatley family, which founded the business.
More generally, it seems clear shareholders who vote against remuneration reports do not want to cause any real disruption.
In nearly every case, they have voted overwhelmingly in favour of the re-election of directors.
Another interesting case was Wesfarmers. It triggered a spirited debate after deciding to change the performance hurdles for managing director Richard Goyder.
The Australian Shareholders Association and the Australian Council of Superannuation Investors opposed the change, but the board was supported by CGI Glass Lewis and ISS.
After a lively debate at the company’s annual meeting, the proposed change and the remuneration report were passed by shareholders (see Performance key to rewards at Wesfarmers).
While Wesfarmers toughed out the criticism, property group Mirvac chose to negotiate a new service agreement for its chief executive Nick Collishaw.
This defused what had been shaping up as a bruising debate over its remuneration practices.
Leighton Holdings is another high-profile company that changed its remuneration practices, scrapping plans to pay former chief executive Wal King a $5 million transition bonus and reviewing his $6 million consultancy agreement.
While this was ostensibly a remuneration issue, it also had a lot to do with the shifting power bases in Leighton’s boardroom.
