Alumina: Still corporate Australia’s easiest gig

There’s a fish-in-a-barrel quality to criticising ceo pay. Most are so extraordinarily overpaid that an entire industry – remuneration consulting – has sprung up to justify it. Nevertheless, a few totemic pay cheques stand out. There’s Scott Charlton, Transurban(ASX:TCL) ceo, who earned almost $5m last year collecting road tolls, and the coterie of bank ceos, each of which earns tens of millions for running a government-mandated skimming operation.

There’s a fish-in-a-barrel quality to criticising ceo pay. Most are so extraordinarily overpaid that an entire industry – remuneration consulting – has sprung up to justify it.

Nevertheless, a few totemic pay cheques stand out. There’s Scott Charlton, Transurban(ASX:TCL) ceo, who earned almost $5m last year collecting road tolls, and the coterie of bank ceos, each of which earns tens of millions for running a government-mandated skimming operation.

Against these examples Alumina (ASX:AWC) managing director and ceo Peter Wasow (total 2014 remuneration: $1.855m) might feel hard done by. He shouldn’t. Peter has one of the least demanding corporate gigs in the country and is paid handsomely to do it.

Alumina is a small business with a $4.6bn market capitalisation. Wasow’s salary is more a reflection of the market cap than anything else. Alumina doesn’t make or sell anything, which is why working in it must be such a dream. Except when Peter’s biro runs out and staff duck out to Officeworks, it has no suppliers. Neither are there any trucks, unions, shopfronts, litigation risks, machinery, logistics, food regulations or landlords.

Alumina’s sole reason for being is its 40% ownership of Alcoa World Alumina and Chemicals (AWAC), the world’s largest alumina and bauxite producer. AWAC employs more than 7,000 people in seven countries. Alumina employs 13 staff in one country (this one), plus a board of five directors.

Their basic task is to manage shareholders’ interest in the AWAC/Alumina joint venture, which is tricky. Alumina is the minority partner in the joint venture and doesn’t have representation on the AWAC board.

As the annual report puts it, 'As the minority partner, the ceo’s ability to ensure that Alumina’s voice is heard draws heavily on his interpersonal skills and years of senior management resources experience'.

Alumina’s executives contribute to 'shaping AWAC’s strategy, competitive position and options', also ensuring the company meets its governance, financial and reporting requirements.

Fair enough. But what shareholders are really paying for is management’s lobbying skills, which the major partner can choose to ignore if it so wishes.

A ceo salary of $1.855m and 2014 board costs of $1,092,168 - including a chairman on $376,470 - are exceedingly generous for a company with only 13 staff and no operational responsibilities, making Alumina a prime example of corporate excess.

The state of affairs hasn’t gone unnoticed. After a $US62.1m loss in 2012, former ceo John Bevan received a bonus worth more than half his salary whilst shareholders suffered a plunging share price and no dividends. Bevan has since left the business with a termination payout of $1.748m.

In 2013, the board received a first strike vote against its remuneration report but was spared a second strike last year that would have necessitated a board spill.

The board’s argument against the motion - that it would be ‘disruptive to the ongoing operations of the business’ – was a non sequitur.

In an operational sense, Alumina doesn’t need a board or a highly paid ceo because AWAC takes care of almost everything.

That’s the point many shareholders were trying to make. Why pay almost $3m a year for a board and ceo to decide on a payout ratio and meet all their compliance obligations but which has very little impact on the actual performance of their investment?

In the face of the first strike motion the punters were thrown a fish. Short and long term incentives were trimmed, along with the new ceo’s base pay, set at a level $40,000 less than his predecessor.

Total executive remuneration has fallen from $5.85m in 2013 to $4.53m in 2014 but the 2013 figure includes the former ceo’s termination payment. Take that out of the equation and total executive remuneration has actually increased by about 10%.

Luckily, Alumina’s share price has been on a tear lately, up 60% in the last two years. That should be enough to avoid a repeat first strike.

Having recommended Alumina’s stock in late 2011, Intelligent Investor Share Advisor members have done well from their investment. But that shouldn’t blind them nor anyone else to the fact that this performance has almost nothing to do with Alumina management.

Shareholders get a chance to ramp up the pressure on 8 May at the company AGM. They shouldn’t waste the opportunity. Alumina’s board and management costs are way too high. They need to fall further. Much further.

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