Eureka Report editor and Age columnist, James Kirby, produced an interesting article regarding John Fletcher’s potential $50 million golden handshake from Coles. Kirby made a semi-reasonable point, noting that:

The only criterion we have for executive salary is the performance of the share price. On that basis, Fletcher took a deeply troubled company trading at $6.50 the day he took the job in 2001 to more than $17 this year, when the company was sold.

However, Kirby’s argument (which was actually sent to him by a Coles shareholder) is misleading. First, while the Coles share price was around $6.50 when Fletcher was appointed, by the time he actually replaced Dennis Eck in September 2001, the Coles share price had risen to $7.40.

Second, using Coles’ current share price (of $15.10) as the “only criterion” to judge management performance is terribly misleading. That is because, without a takeover premium, Coles would be probably be trading at around $10 per share (or maybe even less).

In fact, judging Fletcher’s performance on Coles’ share price is paradoxical because the only reason Wesfarmers (or private equity) would be willing to pay $15-plus per Coles share is because they think management is doing a terrible job. If Wesfarmers didn’t think they could boost Coles’ earnings by 100% they certainly wouldn’t be buying a company decreasing sales on a price earnings multiple of more than 24 future earnings.

Therefore, given Coles’ share price is largely affected by turnaround premium, a better measure of Fletcher’s performance is the earnings per share. Fin FY2000 (the year before Fletcher arrived), Coles earned 41.7 cents per share. That figure dropped to only 26.1 cents per share in FY2001. In FY2006, Coles earned the equivalent of 63.2 cents per share (adjusting for the Myer sale).

Therefore, since 2000, Coles has increased earnings by 52%. In Fletcher’s time alone, Coles increased earnings by 142%, however, Fletcher gets the benefit of a lower base as he took over after Coles’ earnings dropped substantially.

During that same period, rival Woolworths has increased earnings from 30.2 cents per share to more than 90 cents per share, a rise of almost 300%.

Fletcher’s performance is not in the leagues of the appalling CK Chow, George Trumbull or Keith Lambert – but based on earnings performance, it would seem that a $50 million golden handshake is a little rich.

Peter Fray

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