Amid the furor of Sol Trujillo and Pacific Brands, one of the great disappointments of 2008, General Property Trust, last Friday quietly disclosed in its Annual Report that former CEO, Nic Lyons was effectively paid $9.1 million last year.

Lyons resigned in October 2008 after GPT was forced to undertake a deeply discounted $1.6 billion capital raising. Things haven’t improved since his departure with GPT announcing last week that it had lost $3.25 billion last year, largely caused by write-downs on its disastrous Babcock & Brown European joint venture.

GPT, Australia’s oldest property trust, now has a market capitalisation of only $1.56 billion. In April 2007, the group was worth more than $9 billion. The trust was originally floated by Lend Lease in the early 1970s to generate external management fees and create a funds management business. In 2004, GPT security holders rejected a $3.56 per unit internalization proposal from Lend Lease (partially due to Westfield voting against the scheme). At the time, Lyons claimed that the “commercial terms [did] not adequately compensate GPT’s investors”.

Lyons’ 2008 remuneration was largely the result of the Trust waiving $8.3 million worth of loans which he had previously been granted pursuant to GPT’s long-term incentive scheme (GPT announced its intention to waive Lyon’s outstanding liability last October when he announced his resignation). Lyons received actual cash remuneration of $1.15 million for the year ending 31 December 2008, up from $1.14 million the previous year. The $8.3 expense paid by GPT security holders included payment of $3.86 million of fringe benefits tax, writing off the $3.87 million loan to Lyons and accumulated interest of $568,211. Lyons was also provided with a termination payment of $975,000 (equivalent to nine months’ salary).

GPT previously operated a long-term incentive scheme whereby executives were provided with (full recourse) loans in which they could purchase GPT securities. Distributions made by GPT were then used to repay the loan. The use of full-recourse loans is not only rare, but strongly in-line with corporate governance principles. This is because employees remain liable for any shortfall between the outstanding loan balance and the value of the underlying securities. (GPT’s long-term incentive scheme also contained various relative and absolute price hurdles before the shares would vest).

Full-recourse loans serve to strongly align executives with shareholders. This is because if the underlying security increases in value, executives benefit from the price appreciation above the fixed loan amount but if the underlying share price falls, executives actually face a real loss of wealth in line with shareholders. This was acknowledged by GPT in its most recent Annual Report, where the company noted that:

One unique feature of GPT’s LTI scheme is that the loans made under the scheme were “full recourse”…in contrast, similar schemes put in place by GPT’s competitors involve loans to participants that are limited or non recourse in nature such that the downside financial risk for employees is limited to the loss of their LTI grant.

It appears however, that GPT’s best laid corporate governance plans are somewhat fickle, with the Trust telling shareholders later in the 2008 Annual Report that:

Given recent extreme market conditions, and to bring GPT’s executive long-term incentive (LTI) arrangements in line with general market practice, the GPT Board considered it in GPT’s best interest to modify the scheme to make existing loans limited recourse. The Board also decided to implement a more conventional Performance Rights LTI Scheme, which has been made possible by legislative changes to the tax treatment of such plans for stapled securities since the original loan-based LTI scheme was implemented.

It seems that the full recourse loan scheme was only a good idea when executives stood to benefit — when it came to calling in the debt, it appears that GPT were a soft touch. This was confirmed in the 2008 Annual Report which stated that “rather than being a source of positive incentive and alignment, the scheme position became internally distracting and caused concern about the impact on the financial position of employees, all of whom were prevented (under staff dealing rules) to sell, hedge or ameliorate the security price risk”.

In addition to seeing the value of their holdings fall by 92 percent, courtesy of the GPT board, security-holders are now on the hook for fringe benefits tax and loan shortfall costs. Not only did Nic Lyons lead GPT into a joint venture which has literally cost security-holders billions of dollars, but the company then agreed to give the former CEO millions of dollars worth of loans and pay more than $3.5 million in fringe benefits tax.

The GPT Chairman who appointed Nic Lyons and oversaw his remuneration and termination deal as a member of GPT’s remuneration committee is Peter Joseph (Joseph has been a GPT director since 2003 and his indicated he will not seek re-appointment next year). In addition to owning a $55.8 million stake in Dominion Mining, Joseph is also the Chairman of the St.James Ethics Centre. The St.James Ethics Centre’s mission is to “encourage and assist individuals and organisations to include the ethical dimension in their daily lives, and thereby help to create a better world”.

GPT shareholders may be forgiven for thinking that the company has been a little too ethical in its treatment of Nic Lyons.