The longer someone is in a job, the more comfortable they become. On their first day at work, most employees avoid using email for personal use, or checking their Facebook page, or raiding the staff kitchen. That usually changes after a few months when employees fall into their comfort zone.

Such complacency isn’t costly for normal employees, but when the staff member in question is the CEO, the costs to shareholders can be far greater. There are few better examples of this than the way construction giant Leighton Holdings treats its most senior hired help, long-term chief executive Wal King.

Since being appointed CEO in 1987, King has been one of Australia’s best-performed CEOs — Leighton’s returns have been remarkable. Leighton’s share price rose from around $1 when King was appointed CEO to hit $61 in late 2007.

But since the onset of the global financial crisis Leighton’s performance and shareholder returns have been poor. Its share price is now $28.80, which means that for those who acquired shares in 2007 they are suffering a substantial capital loss.

Part of the reason for the drop in share price is the global economic malaise: Leighton’s brands, including John Holland and Thiess, operate in the cyclical construction sector so would typically under-perform in a downturn (admittedly, the effect of Leighton has been cushioned by wonton government stimulus spending on infrastructure). Too, its exposure to the Middle East, in particular debt-ridden Dubai (almost a quarter of Leighton’s revenue is derived from the Middle East and Asia), has hit the company hard.

Fortunately for the very comfortable King, Leighton’s performance has little bearing on his massive remuneration and wealth. In fact, unlike Leighton’s shareholders, who have seen the value of their investment slump by more than half in less than two years, King has little reason to be concerned.

In 2008 King was paid $16.4 million, of which $15.8 million was cash-based (and $4.8 million was ‘deferred’). In 2007, King collected $13.9 million (of which $13.5 million was cash-based). Last year, despite Leighton’s pedestrian performance, King was paid $12.6 million, inclusive of a $5 million cash bonus, which is based purely on Leighton’s profitability (in arguably the most poorly-constructed remuneration structure of any ASX100 company, King receives a fixed portion of Leighton’s profit as a ‘bonus’). King also stands to collect up to $5 million “on achieving satisfactory transition to a new CEO” — something most mortals would consider part of their normal job description.

Not only is King’s remuneration poorly aligned with Leighton’s performance, but one of Australia’s highest-paid CEOs has also been selling a large number of shares in Leighton. On June 23, Leighton announced King had reaped $2.2 million from the sale of 67,000 shares between June 16 and 22. Between June 24 and 28, King continued his selling spree, offloading another 111,500 shares for $3.4 million. (In March, King sold 70,000 shares for $39 each to fund the exercise of 300,000 options for only $18.99 each).

King’s sales were well timed — since the divestiture, Leighton’s share price has slumped by more than 10%.

The share sales contradict King’s comments to shareholders in the company’s most recent annual report, where he noted “the Group’s long-term outlook remains positive based on a strong competitive position in its core markets, a solid level of work in hand and a forecast rebound from the GFC”.

Do as I say, huh Wal?

Peter Fray

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