Former market darling Leighton Holdings has been forced into its second profit downgrade in the space of five months, with the company announcing that full-year earnings would be down approximately $430 million, down from $480 million as previously suggested. For the nine months ending 31 March 2009, Leighton announced a profit of $220 million, adversely impacted by $175 million in writedowns related to Leighton’s investments in toll-roads ConnectEast, BrisConnections and RiverCity Motorway.
While the company reported a steep increase in revenue ($13.7 billion compared with $10 billion for the corresponding period last year) and rise in number of employees (up from 30,410 to 40,504), profitability was markedly down, courtesy not only because of asset impairment, but also problems with the group’s burgeoning Middle East construction business. Long-time Leighton CEO, Wal King, noted that “the Gulf Region, particularly Dubai, has experienced some uncertainty due to the impact of the global financial crisis. We have seen some new work awarded and other projects cancelled or deferred.”
The recent performance of Leighton (the company’s share price has slumped from $65 in November 2007, to around $22.50 now) casts doubt on the legacy of its legendary CEO, King. King was largely praised for his stewardship of Leighton, having originally been employed by Leighton Contractors back in 1968, appointed managing director of Leighton Contractors in 1977 and CEO of the group in 1987.
But while King’s effect on the company has been profound, the Leighton board, led by former TNT CEO, David Mortimer, appears to be suffering from a case of corporate idol worship, much like the boards of News Corporation and Westfield. These companies, with dominant founder or long-time executives, tend to remunerate their CEO based on prior achievements and some sort of legacy, rather than their actual contribution to the firm’s earnings and growth over the year in which the remuneration actually relates.
Despite King’s performance being exemplary over several decades, Leighton’s share price has slipped by almost two-thirds in the last 18 months. Similarly, the group’s earnings have fallen significantly over the past year. While some may argue that the global financial crisis is not something even the best manager can avoid, the same could be said for the preceding decade-long debt fuelled boom, which swelled the profits and bank balances of Leighton executives.
Wal King’s remuneration is among the most excessive of Australian executives. Last year, King was paid a salary of $3.1 million and a cash bonus of $7.6 million. King also received deferred incentives of $4.8 million (for total remuneration of more than $16 million). In 2007, King collected $2.7 million in cash and a short-term bonus of exactly $6 million.
In the past two years, Wal King has taken home almost $20 million in cash alone, while the share price of the company he runs has slumped by two-thirds. (King was presumably very grateful for David Mortimer’s appointment to the Chairman’s role. Under previous chair, Geoff Ashton, King was paid a relatively miserly $4.9 million cash in 2006).
King’s remuneration structure is a magnificent example of how not to structure executive pay. In fact, King’s bonus formula is probably the most egregious example of extreme capitalism in Australia. Leighton’s 2008 Annual Report notes that King’s short-term bonus payment is based on 1.25% of net profit after tax. Therefore, even if Leighton’s profit slumps by half, King still receives a very large bonus because the calculation is made on raw profit, rather than the ability to increase earnings or improve safety.
For example, if Leighton’s earnings slump by 50%, King will still receive a “performance bonus” of $3.8 million. (If King retires, he will also receive a further $4.9 million as consideration for entering into a three-year non-compete agreement. Presumably, the Leighton board is under the belief that many construction companies are looking for 64-year old executives who are accustomed to earning $15 million a year).
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Of course, the fact the King sits on Leighton’s remuneration committee would have no bearing on his poorly structured remuneration. King no doubt leaves the room while fellow directors, Mortimer, Achim Drescher and Peter Noe discuss his remuneration, only to return minutes later to chat over fois gras and Moet.