Crikey

The Smage today launched a blistering attack on Sol Trujillo’s remuneration structure, at one stage quoting a fund manager who labelled Trujillo’s package “a complete joke”. Many of the Smage’s points have already been brought up by Crikey in the past year, with the key criticisms including:

• Telstra hiring three remuneration consultants to determine Trujillo’s package, with one of those consultants having advised Trujillo’s former employer, US West. (Those familiar with telecommunications will know that Telstra’s hiring of US West’s remuneration consultant is akin to QUIT employing a tobacco executive). After Trujillo left US West he collected a golden handshake of more than US$70 million while many employees lost their retirements as the merged company almost went bankrupt. Hardly a package that was in the best interests of shareholders;
• Three quarters of Trujillo’s alleged “long term” options actually “land in Trujillo’s lap in just ten months. This means that if Telstra shares rise by $1 before then he will pocket an extra $15.5 million, which will come on top of his salary, which last financial year jumped $3 million to total almost $12 million”; and,
• The strike price for Trujillo’s options of only $3.67 was determined when Telstra’s “share price was tanking in the middle of the T3 sales controversy”. Further, Trujillo himself “talked down” Telstra prospects at a media briefing only shortly before the options were priced. Since then, Telstra’s share price has conveniently recovered (but still remains lower than when Trujillo commenced), meaning that the options are well and truly “in the money”.

It is refreshing to finally see the Smage and leading fund managers speaking out about executive pay, which seems to continue to grow unabated each year. The Trujillo controversy serves to show how poorly company directors are performing their role as gatekeepers of shareholder interests.

Directors are either too closely linked to the executives they are paying, or too reliant on so-called remuneration “experts” when determining executive pay. Remuneration committees should be able to determine executive remuneration without the help of these “experts” and without agreeing to pay executives millions while shareholder wealth stagnates.

If directors can’t perform such a basic task without outside help, why are they  being paid hundreds of thousands of dollars per year? Warren Buffett put it best in his 2006 Letter to Shareholders:

Huge severance payments, lavish perks and outsized payments for ho-hum performance often occur because comp committees have become slaves to comparative data. The drill is simple: Three or so directors – not chosen by chance – are bombarded for a few hours before a board meeting with pay statistics that perpetually ratchet upwards.

Additionally, the committee is told about new perks that other managers are receiving. In this manner, outlandish “goodies” are showered upon CEOs simply because of a corporate version of the argument we all used when children: “But, Mom, all the other kids have one.” When comp committees follow this “logic,” yesterday’s most egregious excess becomes today’s baseline.

Telstra’s folly in selecting an expert so closely linked with Trujillo has been exposed, with the reputations of Telstra Chairman, Donald McGauchie, and director, Charles Macek, the man who allegedly “wrote the book on corporate governance”, being severely dented by Trujillo’s oversized, and under-linked remuneration package.