Despite receiving a stern rebuff from shareholders last year, the Telstra board appears to consider it their primary role to pay their foreign executives as much as humanly possible. Telstra’s performance for the year ending 31 June 2008 was steady, with Sol Trujillo and his executive team doing a reasonable job eking up revenues and maintaining strong levels of customer service.
However, while much of the business press lavished praise on the result, few bothered to notice that much of Telstra’s profit gains were derived from areas in which it has an entrenched market position and with which its highly paid executive team had little to do.
Overall, Telstra’s sales rose by 4.2%, pretty much in line with inflation. Mobile subscribers increased by 14.5% while Telstra’s BigPond division saw users gained 14.2%. This allowed Telstra to grow net profit by $436 million (13.5%).
Despite its much vaunted NextG applications Telstra was only able to grow mobile revenue by 12.7% – less than the growth in subscribers. This means that Telstra is receiving fewer dollars per subscriber, which contrasts with Trujillo’s claims that Telstra is reaping the benefits of higher spends on its faster network.
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Telstra also benefited from its 50% owned Foxtel passing its tipping point into profitability. Foxtel’s performance has very little to do with Sol and his merry men, who just happened to rock up at the right time as the Foxtel business reached maturity and profitability. Around 20% of Telstra’s profit rise came from an $82 million increase in Foxtel-bundling revenue — that is, Foxtel services for which Telstra bills clients directly (Foxtel subscribers have the choice between paying through Telstra, Optus or through Foxtel directly). Telstra also received a $130 million distribution from its 50% stake in the subscription TV operator. Therefore, around half of Telstra’s profit rise came from Foxtel — a company which Sol can claim no credit for (Telstra’s incentive payments even specifically exclude Foxtel distributions from their calculation).
Mobile data revenues rose solidly, up 76% ($348 million), largely thanks to phones with data capabilities like Blackberries.
So while Telstra’s management has ensured that the company maintained market share and marginally increased profit, they have been paid like kings. Under Sol’s leadership, Telstra hasn’t specifically entered new fields of business, but rather, refined their existing areas and ridden the boom in broadband internet, mobile phones and cable television — all areas in which Telstra previously maintained a dominant market position anyway. Further, Telstra only managed to increase operating cash flows by 2.3% last year — around half the rate of inflation.
However, one item that did increase substantially at Telstra was payments to Key Management Personal — that is Sol and his executive team. Payments rose by 29% to $48 million. Telstra noted in its Remuneration Report that:
In the constant challenge to attract and retain talented executives in a competitive global market, Telstra’s senior executive remuneration links executive rewards with building shareholder value.
If there’s one thing that Australia’s largest telco has shown, it’s that while talk is cheap, executives are not. In the last four years, Telstra boss Sol Trujillo has earned more than $40 million. During that period, Telstra shares actually dropped by around 10% — we wouldn’t exactly call that linking remuneration with shareholder value. And while ostensibly, 80% of Trujillo’s remuneration is “at risk”, such risk is in the eye of the beholder, given that “Lucky” Sol seems to earn close to 100% of his “at-risk” bonus payments every year.
Fortunately for Telstra executives, their long-term incentive is based on stuff that no one really understands (least of all, Telstra directors), nor that they have much direct control over. Trujillo’s LTI payment is based upon “Transformation Releases”, “Multi Service Edge builds”, “Switched Data Network Core exits” and “Ethernet build”. Apartment from the fact that these metrics are difficult for shareholders to assess, there is also the fact that paying an executive a bonus for building a network is like paying the CEO of ConnectEast a bonus for getting the road built earlier — all well and good, but unless it results in higher profits, it is throwing good money after bad.
Telstra remains a solid defensive stock with a dominant market position and is reasonably well managed. However, directors appear to have paid scant attention to the rebuff they received from shareholders last year and continue to pay mediocre management like superstars based on fuzzy metrics.