The King is dead, long live the king? One of the worst-kept business secrets in Australia was finally revealed earlier this week with Leighton Holdings (the owner of construction companies John Holland and Theiss) announcing that Wal King, the man who guided Leighton Holdings since 1987, is being replaced by chief operating officer David Stewart at the end of this year.

The man who spent 42 years at Leighton, the last 24 at the helm, will certainly not be leaving empty handed. But while Leighton shareholders (especially major shareholder, German-based Hochteif, which itself is now subject to a takeover bid from a large shareholder) have experienced a huge increase in profits, not too many appear sad to see King depart.

One of Australia’s few “celebrity CEOs”, King will sadly not only be remembered for being one Australia’s most successful businesspeople, but rather, for spending his last few years at the top of Leighton gouging cash from the company while presiding over a slumping share price. In fact, Wal King may very well be the perfect case study on how boards shouldn’t treat their hired help.

As is often the case, while Leighton was prospering, King’s remuneration was not altogether unreasonable. In 2004, King received cash-based remuneration of $1.49 million (his total pay was $8.2 million, but that was largely made up of share-based compensation). By 2006, King’s cash pay has risen to just under $5 million (and he also received $4 million in deferred payments).

However, when former TNT executive David Mortimer became Leighton’s chairman in 2007, King’s cash pay exploded. In 2008, King collected salary and cash bonuses of more than $10 million, with a total remuneration of $16.4 million. Last year, King was paid more than $8.25 million in cash (and total remuneration of $12.6 million). The increasing remuneration was a sharp contrast to Leighton’s share price performance — since December 2007, Leighton shareholders have witnessed the value of the holding fall by almost 50%. Excluding the rise in Leighton’s share price in late 2007, there has been no appreciation since March 2007.

The reason for King’s ever-increasing cash pay in recent years hasn’t been because of his performance, but rather, an appalling remuneration structure that gave King an annual cash bonus that was based on the company’s actual net profit. That is, King received 1.25% of the company’s annual profit even if the company’s profit actually fell. This remuneration structure was unique for Australian listed companies and  serves to sever any alignment between executive pay and shareholder returns.

In its announcement, Leighton didn’t specify the financial terms of King’s departure, however The Australian claimed:

that King will receive a $4.9 million termination payment and, all things running smoothly, a $5 million transition bonus six months after his departure. Leighton’s 2009 annual report had previously stated that King would receive “a fixed retirement benefit of $12.6 million (accrued under a previous employment contract to 30 November 2005) and in consideration for agreeing to a three-year restraint period following termination, King will receive $4.9 million”.

Few would doubt the contribution that King made to Leighton during his tenure. Since his appointment, profits have risen 87-fold and the company’s market capitalisation has increased from $85 million to more than $10 billion. But it should not be forgotten that King has invested very little of his own money into Leighton — it was shareholders’ capital that was being risked. While for most of his tenure, King proved extraordinary adept at allocating his employer’s capital, ultimately, he was an employee, not an owner of the business. And when the amazing period of profit growth stopped, King’s remuneration continued to rise.

The Leighton board should never have allowed a contract that remunerated King based purely on annual profit and most certainly should not be paying him a $5 million bonus based on a smooth succession (which is, after all, one of the primary jobs of a CEO). One doubts whether King’s replacement, David Steward, will also be on the receiving end of such generosity.