While many in the community are up in arms about skyrocketing
pay packets for public company CEOs, dodgy accounting rules and our
booming stockmarket have left us with a debate based on dreadfully
inaccurate information.

AMP chairman Peter Mason effectively confirmed as much at last week’s
AGM when it came to discussing the accuracy of the remuneration report,
which described the pay packet of CEO Andrew Mohl broadly as follows:

YearCash salaryCash bonusFree sharesFreebie book valueRetention bonus Total
2004 $1.35m $2.16m 420,655 $1.14m $1.5m $6.18m
2005 $1.56m $2.51m 340,337 $1.64m zero $5.75m

Based on changes to the accounting standards introduced by Peter
Costello, options and free shares are to be valued on the day they are
issued. Occasionally, this has proved conservative when a company (ie
News Corp) has not performed.

However, we now have a situation where the collective valuation of all
options and free shares in top 200 annual reports over the past five
years are under-valued by somewhere between $500 million and $1 billion.

The AMP situation is instructive. In 2004, Mohl was issued 340,337
performance rights on 6 September and a further 80,318 on 18
March, making a total of 420,655, which were valued in the annual
report at $1.14 million – just $2.70 a share. In 2005, he was issued 372,129 performance rights on 1 September, but
these were only valued at $1.64 million, the equivalent of $4.40 a

The performance hurdles in both years are that half the shares vest if
AMP out-performs 50% of a basket of comparator industrial companies
over three years and they all vest if AMP is in the top quartile.

Given that AMP shares have surged from about $5.80 to $9.16 over the
period since September 2004 – after also returning $1 a share in dividends and capital – Mason and Mohl
both appeared to agree at the AGM that Mohl is on track to receive 100% of the
free shares issued in 2004. And given the enormity of the windfall for
AMP from Peter Costello’s new superannuation arrangements, only a mug CEO
could fail to lift profits clipping the ticket on an ever-increasing
superannuation pool over the years ahead.

Therefore, the valuation used in the 2005 remuneration report is
misleading because, assuming 100% vesting, the 420,655 free shares
issued in 2004 are worth $3.85 million at current prices and the 2005
issue are worth $3.41 million. That means Mohl’s total package in 2004
was actually worth $8.89 million, not $6.18 million, so a more accurate
picture of
Mohl’s pay packet in the remuneration report would look like this:

YearCash salaryCash bonusFree sharesFreebie real valueRetention bonus Total
2004 $1.35m $2.16m 420,655 $3.85m $1.5m $8.89m
2005 $1.56m $2.51m 340,337 $3.12m zero $7.23m

I totally agree with Peter Mason’s comment that these valuations
fluctuate over time. However, surely it would be preferable to
value them each year. Given AMP’s huge superannuation blue sky, it
would not surprise if Mohl retires in 2010 with more than 8 million free
shares worth about $100 million, yet the annual
reports over the years would only have claimed they were worth about
$10 million.

What’s the point producing figures which bear no
resemblance to reality, particularly on a highly charged issue like
executive pay? Is it really too much simply to ask for some accurate
facts? I told the AGM that AMP is Australia’s leading institutional
campaigner for good governance and should be leading the charge for
reform in this area, rather than setting a bad example for everyone.
Sadly, no firm commitments were forthcoming, but Peter Costello could
fix all of this with a quick stroke of his legislative pen.

Peter Fray

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