The “Minister for Telstra”, Nick Minchin, came out yesterday in support of Sol Trujillo’s mega pay package, noting that: “In the eyes of politicians and ordinary Australians these packages look startlingly big, but (Mr Trujillo’s) is not all that unusual a package.”

Despite Minchin’s views, in light of Telstra’s recent performance, Trujillo’s remuneration for 2006 was “startlingly big”. Back in 2003, former Telstra CEO Ziggy Switkowski collected only $2.4 million for performing the exact same job that Trujillo was paid $8.7 million for.

Woolworths CEO, Roger Corbett, who has almost doubled earnings in the past five years collected less than Sol in 2005, while Unitab’s Dick McIlwain, another star CEO, earned only $1.5 million last year. In the telco sector, Paul O’Sullivan, CEO of Optus, earned AUD$1.9 million in 2005, while Hutchinson chief, Kevin Russell, also took home a far less startling $1.9 million last year.

Not only was Trujillo paid a sum equivalent to around 174 times the average wage last year, but he was paid far more than other telco bosses when all he has achieved in his brief time at the helm is an outline of a plan to transform Telstra. The plan has not yet even had a chance to be successful.

If Trujillo’s strategic review and plan actually work, he certainly should be entitled to receive lucrative short-term bonus payments. However, until that happens, perhaps stopping at his fixed salary of around $3 million would have been more appropriate.

One of the reasons for Trujillo’s lucrative payday is the absurd metrics which Telstra uses to determine what proportion of the maximum short-term incentive is paid out. Telstra’s Remuneration Report notes that Telstra executives’ short-term bonuses are based on the following flawed measures:

EBITDA

Nothing wrong with using EBITDA as a benchmark, except that in Telstra’s case it actually decreased during 2006.

Cost Reduction

Isn’t this what executives are paid millions in fixed salary to do? Surely bonuses should come from growing a business and creating sustainable wealth for shareholders, any hack can just sack lots of staff or reduce R&D spending.

The number of sites that are equipped for 3G

Telstra shareholders have good reason to question why a telecommunications company would pay telecommunications executives short-term bonuses for simply setting up a phone network. This is akin to McDonald’s paying its CEO a bonus because its burger flippers didn’t burn the meat.

Broadband market share

Broadband profitability would have been a more useful measure than market share. Basing a bonus on “market share” encourages management to cut customer charges to increase share, allowing executives to earn fat bonuses without actually creating wealth for shareholders. It is interesting to note that in 2006, Telstra increased the number of its broadband subscribers by 66% but encountered a decrease in revenue-per-subscriber of 13%.

Individual accountabilities

This is a vague measure – surely paying a bonus based on a measure like net profit would be a more useful means of aligning shareholders and executives.

Therefore, Telstra executives (including Sol) received 73.8% of the maximum STI payment in 2006, despite the most important of Telstra’s KPIs — profitability –actually falling significantly during the year.

In yesterday’s Crikey, Stephen Mayne commented that “if Sol has really done a bad job, then his critics need to point to specific mistakes he has made. I’m struggling to see anything substantial after just one year.” Sure, Trujillo hasn’t made any huge mistakes (that have materialised anyway), but surely a “lack of mistakes” is no reason to pay a CEO $8.7 million. That kind of remuneration should come from creating real wealth for shareholders, and with Telstra’s share price down 27% last year, Sol certainly hasn’t achieved that.

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Peter Fray
Peter Fray
Editor-in-chief of Crikey
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