BHP buries easy-picking executive pay

Andrew Mackenzie and co have done the right thing by not following the letter of the company's remuneration law, which only requires management outperform its peers.

The BHP Billiton board’s decision to use its discretion to reduce the grants of shares that will vest with its senior management, and Andrew Mackenzie’s decision to voluntarily walk away from a further $1.8 million of shares he was entitled to, should be applauded.

It’s not as though any of the executives, Mackenzie included, who saw the awards they were technically entitled to cut by 35 per cent – more than $24 million of value – are going to worry too much about meeting their mortgage commitments as the seven executives concerned will still get shares with a combined value of more than $40 million.

It does, however, send a signal that the BHP board and Mackenzie are conscious that, while the group has generated total shareholders returns over the past five years that have streeted its peer group, those returns are still negative.

Under BHP’s long term incentive plan for its management committee the awards of shares vest in full if the group generated a total shareholder return that is at least 5.5 per cent a year higher than that of its peer group, or 30.7 per cent compounded over the five years. BHP’s TSR over the five years since 2008 was negative 9.4 per cent – but the peer group produced a negative 44 per cent weighted average TSR.

Technically, therefore, the management committee easily met the hurdle for full vesting of the shares. The board’s remuneration committee, however, has the over-rising discretion to reduce the number of shares that will vest and it exercised it, reducing the awards by 35 per cent for all of the executives.

Mackenzie, whose base remuneration is already lower than that of his predecessor, Marius Kloppers, in an acknowledgement by the BHP board of the very different conditions within the resources sector, went a step further and volunteered to forego a further 50,000 shares he was entitled to. Those shares relate to a "sign on" award he was granted to compensate him for equity awards foregone when he joined BHP from Rio Tinto in 2008.

BHP said that the outcomes of the 2008 incentive plan reflected a remuneration structure that the remuneration committee and the board believed had contributed to the "substantial" financial outperformance of BHP over the years but also reflected a "more modest" approach to remuneration that befitted the times.

There will always be controversy over the amounts of remuneration and incentives paid to the senior executives of listed companies, particularly the larger ones, where the amounts can appear stratospheric to most within the community.

What really grates, however, is when executives appear to be rewarded for poor performance or where their remuneration is rising even as shareholder returns are falling.

The BHP team (and the executives affected include Kloppers and other former key executives who have left the group as well as still-serving executives) have clearly outperformed their peers since 2008, and by a very large margin.

In the volatile circumstances the resource sector has operated in since 2008 it would have been relatively easily for the board to rubber stamp the awards on the basis that BHP shareholders lost far less value than the shareholders of the group’s peers.

For most of the five years, BHP shares traded at historically high levels and the group has returned, directly or through buybacks, more than $US55 billion to shareholders over the past decade. Despite the steep fall in its earnings in the latest financial year the group again increased its dividend and Mackenzie has made it clear he would like to further improve returns to shareholders as he introduces more discipline on capital spending and responds to the urgings of the group’s institutional shareholders for less investment in the business and more cash for shareholders.

Nevertheless, it’s not a good look to appear overly generous with largesse that effectively comes out of the pockets of ordinary shareholders during what is now a tough time for the sector.

BHP’s decision to prune the awards is the right gesture to make in the current environment and Mackenzie’s extra contribution strengthens the message to shareholders that he and his board recognise that times have changed and that it is important that the incentives and rewards for its executives are seen to be aligned with the interests and experiences of shareholders.