The Telstra board and management have thrown another hand grenade into public debate this morning with the simultaneous release of a disappointing full-year profit and a fabulously generous new employment deal for CEO Sol Trujillo.

Telstra pulled the whole market back in morning trade as its shares tumbled 17c to $4.54, vaporising $2 billion off its market capitalisation because investors were unimpressed with a negligible increase in net profit from $3.2 billion to $3.3 billion. The guidance was also underwhelming with forecast EBIT growth of just 3-5% in 2007-08.

Sol’s transformation program is in full swing with a record $5.7 billion in cash expended on capital expenditure in 2006-07 and a further 1,887 jobs shed.

The analysts’ briefing was reasonably upbeat across the operations, save for the usual bleating about an unlevel playing field and a $110 million write-down against Trading Post, confirming what critics said from the start about Ziggy Switkowski’s team paying too much in out-bidding Fairfax for that business.

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There’s an avalanche of information to digest in the 304 page statutory accounts, but we’ve got two releases on executive pay issues – the full details of Sol’s lucrative new contract and a long press release headlined “Telstra sets tough performance hurdles”, justifying the new deals which include the issuance of 118 million options to the top 260 executives.

Telstra has taken note of the big protest vote against its remuneration report last year because all options for the senior executive team, excluding Sol’s special deal, will lapse if Telstra doesn’t deliver a total return of 55% between July 2006 and July 2010.

Chairman Don McGauchie declared himself to be “very pleased” that chief operating officer Greg Winn had signed a new deal, but there was no such sentiment for Sol, suggesting relations might have cooled somewhat.

Sol’s new package comprises a $3 million base package and then a short-term incentive capped at $3 million in cash and $3 million in deferred free shares.

The long-term incentive is an options play over 20.6 million shares with the first tranche of 10.3 million shares issued at just $3.67 a share, so they’re already $10 million in the money. The second and third year entitlements are both over 5.17 million shares. Sol’s options start to kick in with just an 11.5% increase in Telstra’s wealth – a disparity that will surely generate some heat internally and with shareholders.

Tougher hurdles kick in for Sol to score all his options, but if the big-talking American can get Telstra shares up to $7 over the next three years, he’ll walk away with more than $100 million from his five year trip Down Under. Based on this morning’s results, that’s no easy task.

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