Former market darling QBE Insurance yesterday performed a stunning backflip and agreed to amend CEO Frank O’Halloran’s retirement benefits and also include a separate resolution pertaining to the company’s deferred compensation plan at its upcoming Annual General Meeting. QBE announced the changes in a letter to “major investors” prior to its AGM being held on 8 April 2009. The announced changes came after institutional advisory firm RiskMetrics recommended its clients vote against the non-biding resolution seeking to approve its Remuneration Report.

QBE’s 2008 Remuneration Report provides that the O’Halloran received total remuneration of $6.7 million in 2007/08 (consisting of $1.7 million base salary and $2.8 million in short-term cash bonuses). In 2006/07, O’Halloran received total pay of $6.03 million. In 2007/08, O’Halloran’s bonus increased by 12% to $2.8 million.

QBE noted that the payment of short-term bonuses was “to recognise the contributions and achievements of individuals when annual financial return on equity and investment income targets relating to the previous year’s financial performance… are achieved or exceeded.” It is noted that in 2007/08, QBE recorded a 3% decrease in net profit, while its share price has fallen by approximately 45% since its October 2007 peak.

On top of his annual remuneration, QBE had also agreed to provide O’Halloran with a termination payment equivalent to 150% of total remuneration (details of O’Halloran’s termination entitlements were buried at page 135 of the Annual Report, rather than in the Remuneration Report). Based on O’Halloran’s 2008 remuneration, it appears he would have been entitled to a cash payment of $6.75 million (as well as the vesting of all previously unvested options), even if he chose to retire for his role.

In its report to clients, RiskMetrics recommended that shareholders vote against the company’s Remuneration Report. The advice was made on the basis that QBE operated an equity incentive scheme which was not in accordance with investor expectations and because the company had abandoned its prior practice of seeking shareholder approval of equity grants after previous “against” votes from shareholders at recent Annual General Meetings. RiskMetrics was also noted that the potential termination entitlements payable to executives were “excessive”.

RiskMetrics specifically noted that QBE did not maintain a traditional long-term incentive scheme, but rather, utilised a “Deferred Compensation Plan”, which did not require the satisfaction of performance hurdles before the equity instrument would be able to vest.

In its response to shareholders, QBE took the unusual position of alleging that RiskMetrics provided a “jaundiced” opinion regarding its Remuneration Report. However, despite the criticism, QBE Chairman, John Cloney, appeared to follow the advice of famed US justice, Louis Brandies who noted that sunlight is the best disinfectant. Notably, QBE yesterday appeared to have amended its remuneration practices almost directly in accordance with RiskMetrics’ so-called “jaundiced” recommendations. Perhaps Cloney has spent the past few weeks on a Noosa sun-lounge alongside the critical prose.

In response to QBE’s earlier claims, Martin Lawrence, of RiskMetrics, told Fairfax that the RiskMetrics’ report was correct and that QBE “haven’t identified a single inaccuracy.” Lawrence also noted that “if [QBE] told us those changes yesterday, we would have changed our original recommendation and told shareholders to vote for it. We will be re-issuing our report tomorrow to take account of the changes, after seeking clarification from the company.”

QBE Chair John Cloney is no stranger to remuneration controversy, with the former executive also the Chairman of the Remuneration Committee at building company, Boral. Last year, Boral’s remuneration report was overwhelmingly rejected by shareholders after the company purported to pay chief executive, Rod Pearse, a fixed salary of $2.2 million and a $2.23 million cash bonus despite its poor financial and share price performance.

Peter Fray

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