Last week’s announcement that Telstra’s chief financial officer Robyn Denholm was quitting to become chairperson of electric car maker Tesla came as a shock.
Her move is as surprising as it is fascinating. It follows former chairman Elon Musk being sued for fraud by the US securities regulator and removed from the role. They were concerned about him recklessly tweeting a drug-themed falsehood that caused Tesla’s stock price to soar, then crash.
Replacing Musk with Denholm has many implications, one of which might be bad news for those of us who want to keep a lid on executive pay in Australia.
Bringing home the bacon
Let’s be clear: Robyn Denholm was not poorly paid at Telstra. She made $2 million in 2017-18 as its chief operating officer. In late 2018 she stepped up to the plate as chief financial officer, a promotion that was likely to come with a pay rise. But Denholm had a side-gig. She had been on the board of Tesla as a director (what Australians would call a non-executive director) for several years. This set her up to become chair of Tesla.
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And the side-gig was lucrative.
Being a non-executive director is normally a job young executives do to extend their resumes, or older executives to ease their way into retirement. The work is modest — often just 12 meetings a year, and the pay is not crazy by executive standards. In the US, average director pay is $91,857 p.a., according to analysis firm management consultants Spencer Stuart.
The pay is more at bigger companies, but not much more so. In fact, Denholm was only paid $45,000 cash per year on the board of Tesla. But the real money was in the stock options.
In 2014, she had total compensation of US$7.2 million. In 2015, it was US$4.98 million. With no stock options in 2016, $US45,000, and in 2017, US$4.92 million.
When you look at it in financial terms, really, Telstra was her side-gig. Especially as the Aussie dollar fell, making those US dollar values rise.
In paying its board like this, Tesla is a massive outlier. Doing so is widely considered to be bad for corporate governance.
“You start paying directors of corporations two or three hundred thousand dollars a year, it creates a daisy chain of reciprocity where they keep raising the CEO and he keeps recommending more pay for the directors,” said Berkshire Hathaway vice chairman Charlie Munger in 2014. (Berkshire Hathaway pays directors under $7000 a year.)
Directors set executive pay. While Elon Musk gets no salary, his bonus scheme is colossal. Musk’s audacious compensation plan could net him $55 billion in remuneration if the company succeeds — on top of the upside he gets from owning so much of Tesla. Musk could be very well rewarded. And it looks like Denholm will be too.
In 2018, Denholm is scheduled to get more options due to her longevity on the board, plus thousands more options for becoming chair.
Can Australia compete?
The poaching of Denholm could not have come at a worse time for anyone hoping to stem the incessant rise of Australian executive salaries.
Median realised pay for an ASX100 CEO rose 12.4% in 2017, according to analysis from the Australian Council of Superannuation Investors, while workers got average pay rises of 2% — at or below inflation.
Corporate Australia is always talking about how they have to compete globally for talent, and that talent will leave if we don’t pay enough. Telstra’s own chairman said this exact thing, just before Denholm up and went.
“First class leadership could not be more critical,” said Telstra chairman John Mullen during the company’s 2018 Annual General Meeting. “A number of things contribute to our being able to attract, retain and motivate high calibre executives, one of which is remuneration.”
I publicly scoffed at this statement. Who would want Telstra CEO Andy Penn, I asked. But I didn’t think about Denholm being poached.
In next year’s round of executive compensation discussions, you can expect the compensation consultants to bring up Denholm’s name a lot. Pay up or lose your staff — that’s what they will say. But it is worth bearing in mind whether that is true, there’s only one Tesla in the world, after all.