Another year, another round of executive pay excess, with the same companies paying millions of dollars to the same old under-performing executives. And while shareholders receive a non-binding say on pay, it appears that for some directors, shareholders should be seen and not heard.
After years of woeful under-performance, the Paperlinx board, led by esteemed member of Melbourne’s directors club David Meiklejohn, resolved to pay outgoing CEO Tom Park a $962,967 bonus and base salary of $1.8 million this year. Under Park’s leadership, Paperlinx shares lost about 90% of their value. Such generosity encouraged 67% of shareholders to repudiate the company’s remuneration report. Meiklejohn and his fellow board members proved that they are slow learners, not heeding the views of the 18% of shareholders who did not vote in favour of the remuneration report in 2009.
Paperlinx wasn’t the worst offender — building and trade materials seller Crane Group also suffered an almighty rejection of its generous remuneration practices with more than 75% of shareholders rejected the non-binding pay resolution. This may have been because over the past three years Crane’s CEO Greg Sedgwick has been paid millions of dollars annually to deliver a return of negative 19%. Crane’s performance is especially poor given its main competitor Reece, managed to grow earnings by 19% this year and pays its entire board and CEO less than what Sedgwick receives.
But pesky issues such as the share price or earnings don’t seem to have bothered the Crane board. Chairman Leo Tutt (the man who was chairman and recommended that MIM shareholders sell out to Xstrata for billions less than the company was worth), stated that “the financial strength of the company’s balance sheet continued to improve”, despite also noting that profit was down 35%. Crane’s performance is even worse when you consider that in 2006 it earned $74 million profit and had 59 million shares while year, it earned $32 million on 78 million shares.
For this less-than-stellar performance, Sedgwick was paid $4.8 million, including a $635,420 bonus. Tutt and the Crane board also have given Sedgwick possibly the most generous termination entitlement in the country. If Sedgwick chooses to resign, he will receive more than $1 million — if he is terminated he will receive almost $4 million.
The common thread among most poorly designed remuneration packages remains cash pay — that is, fixed remuneration plus short-term bonus. With equity-based incentives, while they rarely provide a perfect alignment between shareholders and management, there is at least a degree of correlation. The value of equity incentives fall if the executive performs poorly. The same cannot be said with cash, which is eminently non-refundable.
Somewhat perversely, while remuneration reports go into great detail about how long-term equity incentives are paid, boards provide scant details as to the actual hurdles that underline awarding short-term cash bonuses. Admittedly, this may be because they are entirely discretionary in many cases. In fact, in some instances, the board gives a short-term cash bonuses to bump up executive remuneration when the company has performed so poorly such that the executive responsible for that poor performance misses out entirely on their expected long-term incentive.
There is no better example of this than at infrastructure operator, Asciano — a company steeped in incompetence since its creation in 2007 when it was spun-off from logistics company Toll. The spin-off was allegedly prompted because Toll chief Paul Little didn’t want to let his assistant, Mark Rowsthorn, take the reins of the company. Rowsthorn happened to be the son of former Toll chairman Peter Rowsthorn. Since its creation in 2007, under Rowsthorn’s guidance, Asciano’s share price has fallen by about 85%. In 2008, burdened by a huge debt load, the company was forced into an emergency capital raising (fortunately for Rowsthorn, UBS, the bank which Asciano hired to arrange the capital raising entered into a special arrangement with the CEO, which allowed him to make himself makes millions from the deal).
This year, the board paid Rowsthorn $4 million in cash alone, including a $900,000 “re-signing” bonus. This generous cash payment, which was announced only weeks after Asciano announced a $1 billion non-cash charge, made Rowsthorn the 24th highest-paid CEO in the country in 2010 in cash terms.
So what is a poor shareholder to do? Institutions and retails shareholders have several options. First, instead of voting against a remuneration report (as many have been more willing to do), they should cast their binding vote against the chairman and head of the remuneration committee. Second, an even more logical option would be avoid buying shares in companies that pay poorly performed executives based on irrelevant (or non-existent) metrics. Why buy part of a company such as Asciano or Paperlinx or Crane, which deliver terrible returns on equity and overpay poorly performed CEOs, when companies such as Oroton, CSL or JB Hi-Fi proved that the best CEOs are often the least expensive…