In his infamous 2013 Crikey article that precipitated his sacking from Fairfax (and subsequent employment by Crikey), Paddy Manning alleged that the Australian Financial Review had become “fundamentally ideological in its inevitable pro-business slant”. Manning, who has since become one of Australia’s best-selling business authors, would be vindicated by the Financial Review on Friday, in which Ben Potter laboured to defend CSL’s remuneration practices.
Biotech company CSL has arguably been Australia’s best success story of the last two decades. However, investors turned on its pay practices after the company increased the potential remuneration of US-born CEO Paul Perreault (and gave themselves a hefty pay rise as well). Perreault’s remuneration is now higher than that of former CEO Brian McNamee (under McNamee’s leadership, CSL’s market value increased 100 fold). As Stephen Mayne noted in Crikey on Friday, 26% of CSL investors voted against the company’s remuneration report, 27% against Perreault’s generous bonus plan, and more than a third of shareholders opposed the director pay rise.
However, instead of celebrating the success of the shareholder action, Potter, whose usual beat is climate and industrial relations, claimed that CSL shareholders “seem to have missed the wood for the trees” questioning:
“Do we really want local companies to venture beyond our shores to compete in modern IP and research-based industries?
“Or do we just want to invest in banks, miners and telcos — via institutions that want companies to stay at home — and let the next CSL list in New York or London?
“CSL has achieved a compound annual return of 27.6 per cent since being floated off by the Keating Labor government in 1994. By comparison, the S&P/ASX20 index has struggled to produce a 6 per cent total annual return over the past 10 years — 5.92 per cent to be precise.”
Potter’s claims seem misguided. First, he argued that the sky-high remuneration was needed because we want local companies to compete offshore. The issues are completely independent; one doesn’t need to pay a huge amount to a CEO to justify international expansion, which for a business like CSL is a fundamental part of the job. It’s a classic example of the “heads I win, tails you lose” approach to executive remuneration.
Potter then made an even more bizarre point — that shareholders were wrong to vote against the remuneration report because CSL has delivered a 27% annual return since being floated in 1994, far higher than the ASX has returned. While CSL certainly has been one of the best-performing companies since 1994, this has had almost nothing to do with Perreault, who only became CEO in July 2013. Moreover, since Perreault become CEO, CSL’s earnings per share and profits have largely flat-lined (its share price has risen, but that is in line with the general inflating of price earnings ratios).
Perreault’s remuneration now includes almost $6 million in fixed and cash bonuses (with very soft short-term bonus targets), and around $4 million in long-term bonuses.
Potter then gave the rallying call of overpaid CEOs and their hand-picked remuneration “experts”, claiming that CSL “earns more than 90 per cent of its revenue offshore in a fiercely competitive, IP-based industry dominated by US and European giants. Its pay practices are inevitably evolving towards those in the markets from which it increasingly recruits top executives to take on its global rivals.”
Many thought the notion that Australian companies need to pay over the odds to US executives was dead and buried after the Sol Trujillo fiasco at Telstra. Let alone poor old Aussie McNamee, who built CSL from a small offshoot of the CSIRO to a global behemoth, but apparently deserved less pay than his US-based successor.
It’s always tempting for directors to continue to pay executives more and more. For one, a higher paid CEO (wrongly) implies a higher-quality CEO — so it looks like the directors have done a better job themselves. Moreover, when a business is making as much as CSL, an extra few million here and there is merely a rounding error.
But while it may be tempting, paying more to executives often increases the riskiness of the business, and all too often, the highest paid executives tend to underperform compared to the lower paid ones. The CSL board has failed shareholders — and those shareholders were correct in rejecting the generous practices. Just don’t expect to read that in the AFR.
* Adam Schwab is the author of Pigs at the Trough: Lessons from Australia’s Decade of Corporate Greed