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Bosses sacrifice bonuses to avoid shareholder revolt

Two strikes ... doesn't give shareholders any more rights than they already have. Dean Paatsch, Ownership Matters It's no longer just a regulatory or compliance issue ... it's an engagement tool as well. Mike Hogan, Ernst & Young

Executives at the country's top companies are showing abstinence is fashionable again - for a good reason, writes Elisabeth Sexton.

If you are wondering how closely listed companies watch each other when it comes to the sensitive topic of executive pay, consider announcements made this year by Australia's two biggest miners.

In February, Rio Tinto's chairman, Jan du Plessis, said: "Tom Albanese and Guy Elliott have notified the remuneration committee that they do not wish to be considered for an annual bonus and I think that is absolutely right."

A fortnight ago, BHP Billiton's chairman, Jac Nasser, said: "Marius Kloppers and Mike Yeager have advised the remuneration committee that they do not wish to be considered for a bonus for the 2012 financial year. The remuneration committee and the board respect and agree with that decision."

All of a sudden abstinence is fashionable.

Not only did BHP follow its rival in abandoning bonuses for its top executives because of multibillion-dollar write-downs in recently purchased assets, it also chose precisely the same way of presenting the news.

The pitch was that forgoing the bonus was a voluntary initiative by the executives involved, an offer accepted by their grateful boards.

It forestalled the ignominy of the boards withholding the bonus payments, which would have looked more like a punishment and less like a sacrifice. In turn, the bonus announcements should improve the atmosphere at the next annual general meetings for the companies.

Then it will be the turn of shareholders to be gracious. When the time comes to vote on the remuneration report, there will be less reason for them to take the cane to the directors.

The triggers for the sacrifices were a $US9 billion ($8.6 billion) write-down in the value of Alcan, which Rio purchased for $US38 billion in 2007, and a $US3 billion write-down in the value of US shale gas assets, for which BHP Petroleum paid $US5 billion in February 2011.

The bonus for Albanese, Rio's chief executive, last year was $US1.2 million. Its chief financial officer, Guy Elliott, received a bonus of $US989,000.

BHP's chief executive, Marius Kloppers, received a cash bonus last year of $US2.3 million and the head of BHP Petroleum, Mike Yeager, received $US1.3 million.

BHP and Rio are not the only big companies cutting pay. This week, the chief executive of BlueScope Steel, Paul O'Malley, and his counterparts at Goodman Fielder, Chris Delaney, at Platinum Asset Management, Kerr Neilson, and at ANZ Bank, Mike Smith, announced new or continuing pay restraint.

They followed the chief executive of the Commonwealth Bank, Ian Narev, the head of the Coles supermarket chain, Ian McLeod, and the chairman of the funds manager Perpetual, Peter Scott.

Bosses who are taking home less this year in long-term incentive pay because the required performance hurdles were not met include the chief executive of the wealth management group AMP, Craig Dunn, and the chief executive of Macquarie Bank, Nicholas Moore.

It's hardly a stampede but the number of executives of large companies making a virtue of austerity is in contrast to the explosion of executive pay in the past 20 or so years.

Research published by the Australian Council of Superannuation Investors shows that in the decade to 2010, median fixed pay for chief executives in the top 100 ASX Australian companies increased 131 per cent and the median bonus increased 190 per cent.

This compared with a 31 per cent increase in the S&P/ASX 100 index over the same period.

In a small way, the recent announcements are a neat reply to the familiar refrain from prominent company directors that laws to ensure greater disclosure would only have the perverse effect of increasing pay by making it easier for executives to discover how much their peers were being paid.

Perhaps in tough times compulsory disclosure will create peer pressure of a different kind.

The context for the pay cuts is a tough global economy and a local sharemarket index that fell 11 per cent in the year to June.

Another factor is the second year of new laws designed to give shareholders greater say over executive pay. The so-called "two strikes" legislation came into force in July 2011 and could bite this year. During last year's annual meeting season, 23 companies in the S&P/ASX 300 index received "first strike" votes of 25 per cent or more rejecting the remuneration report.

If the same companies, listed in the table, receive a second-strike vote of 25 per cent or more this year, shareholders will then automatically vote on whether to proceed to a spill of the board.

If more than 50 per cent of shareholders vote in favour of the spill motion, another meeting must be held within 90 days when all directors must seek re-election. The threshold at the second meeting is also 50 per cent.

Shareholder advisory group Ownership Matters has been discussing remuneration with listed companies on behalf of its institutional investor clients.

Its director Dean Paatsch says it is too early to tell whether the pay cuts announced recently are a result of the new legislation.

"The thesis really about two strikes is that it doesn't give shareholders any more rights than they already have," Paatsch said.

He points out that any shareholder with a 5 per cent stake already has the right to call a meeting to consider a board spill.

"What it does do is put a director's reputation on the front page of the paper and that's the most valuable asset that a non-executive director has. Two strikes puts that at risk through media attention."

It is common for executives of listed companies to receive a fixed salary and to be eligible for a cash bonus if short-term hurdles are met and for shares if long-term hurdles are met. Sometimes a cut in one of these components is outweighed by a rise in another.

When it was reported recently that the Commonwealth Bank was freezing the pay of senior executives, including the new chief executive, Ian Narev, it revived memories of a similar initiative under his predecessor, Ralph Norris.

Norris cut his fixed pay by 10 per cent for the six months to December 2009 "during the worst of the global financial crisis", the bank said in its annual report.

However the impact of this cut, which resulted in Norris's fixed pay falling from $3.3 million to $3.1 million in the year to June 2010, was swamped by increases in the value of various share-based payments Norris was entitled to under long-term incentive plans previously approved by shareholders. His total remuneration in the year to June 2010 rose from $9.2 million to $16.1 million.

Paatsch says that while the recent sacrifices of short-term bonuses by Albanese and Kloppers are "more than symbolic", the pair have done well in the past year under their long-term share schemes.

When the Rio annual report was released in March, it emerged that Albanese's total remuneration in the year to December rose. His fixed salary increased from $US1.4 million to $US1.6 million. His cash bonus fell from $US1.2 million in 2010 to zero, as du Plessis had announced in February. The value of shares he was awarded under long-term plans rose from $US3.7 million to $US4.6 million. After adding superannuation, his total remuneration for the year was $US8.62 million, up from $US8.36 million in 2010.

BHP, which has a June balance date, reports its full-year results next week.

Paatsch says the bonus sacrifices "have got people talking ... but what's not remarked upon is that the [long-term incentive plans] which were issued at a time when the share price was on its knees have all been paid out".

Like Albanese, "Kloppers as well has a substantial amount of equity that's vested in the last year", he says.

The share awards are based on plans approved by shareholders three to five years ago that the executives would receive shares if the company outperformed a peer group of other large companies.

Nevertheless, Paatsch gives credit to the two chief executives because forgoing a bonus "is a gesture that's been open to many, many other companies at various stages of the cycle and not many people have done it".

Mike Hogan, a partner of the accounting firm Ernst & Young, advises listed companies on remuneration. He says his clients are focusing more than they used to on explaining their remuneration policies to the market.

"It's no longer just a regulatory or compliance issue increasingly it's an engagement tool as well," Hogan says. "A lot of organisations are adding information to the remuneration report to make it a more cogent document. They are saying, 'we want to make it easy for you to understand how we have come to these decisions and easy for you to vote in favour."'

He says the change is not so evident in relation to long-term incentives offered to executives, typically in the form of shares. The long-term hurdles are easily identifiable measures, such as growth in earnings per share or improvement in total shareholder return.

However when it comes to short-term incentives, usually cash bonuses, "there are areas where the board does need to apply its judgment and they do so", Hogan says.

"The LTI [long-term incentive] tends to take care of itself because it is typically objectively quantifiable," he said. "It's the STI that's really the focus for institutional investors and the shareholder advisory bodies. That's where it's a bit more 'black box' for them."

Some companies are publishing charts linking the company's performance to executive pay. Others are writing explanations.

"They say at a macro level, here are some indicators that should make you feel comfortable with the STI," Hogan said.

He says in general terms, increases in fixed salary have been "very very constrained, consistent with the broader market".

When it comes to bonuses, "if the performance is there and the outcome is there then they will get paid something if the performance is not there, then they won't". He says it's too early to judge the impact of the new legislation. "Nobody's keen to get a strike and I imagine nobody's keen to get a second strike," he says.

An example of the new tone from listed companies is Thursday's announcement of a 16 per cent drop in annual net profit from the funds manager Platinum Asset Management.

At last year's annual meeting, 3.86 per cent of shareholders voted against the remuneration report.

"Despite the low 'no' vote ... the company has taken the opportunity to better explain the basis and structure of remuneration paid to its key management personnel (KMP)," Platinum's chairman, Michael Cole, told shareholders on Thursday.

Cole highlighted that in the year to June, there had been no increase in base salary paid to any of the key personnel, only two of the six KMP received a bonus this year, there were no options granted or exercised during the year, and "the managing director waived his right to receive a bonus in 2012 and this has been ratified by the remuneration committee".

Shareholders had to read further into the report to see that the managing director, Kerr Neilson, had also forgone a cash bonus last year. That gesture went unremarked by Cole in the 2011 results announcement.

Neilson's main return from Platinum is not his $448,000 remuneration as managing director but the dividends he receives as the owner of 57 per cent of the company.

The final dividend of 13 cents a share announced on Thursday was two cents lower than last year's second-half dividend, but that is an outcome Neilson shares with all shareholders.

The role of directors who are also owners of large stakes in public companies could affect the outcome if there are any second strikes this year. When the gaming company Crown suffered a 55 per cent vote against its remuneration report last year, its chairman, James Packer, said the new law would leave the company in a "farcical position" because he would use his 46 per cent stake to support the incumbent board.

Under the new rules, shareholders associated with a recipient of remuneration are not allowed to vote on the adoption of the remuneration report, either at the first strike or the second strike.

Nor, if there are two votes against the report of over 25 per cent, can they vote on the automatic resolution to call another meeting to consider a board spill. However they are allowed to vote if the second meeting proceeds and all directors are forced to seek re-election.

The likelihood that even two strikes against companies with owner-directors will not lead to a change in remuneration has led to some corporate criticism of the new regime.

Another argument commonly raised by directors and executives is that the two-strike regime can be abused by a shareholder who wants to spill the board for reasons unrelated to remuneration.

In a note to clients last week, the law firm Minter Ellison warned those agitating against the new system that if it is "seen to fail", it could be replaced by something more draconian.

The lawyer who wrote the note, Nicola McGuire, says the concern being expressed by companies is that even if a spill motion were not guaranteed to succeed, a dissident shareholder with about 20 to 25 per cent could force negotiations on changing the composition of the board merely by threatening to vote against the remuneration report.

McGuire says if such concerns persuade a future Australian government to change the regime, recent reforms in Britain are likely to be closely examined here.

"The UK has put a binding vote into place, rather than the Australian advisory vote that then leads to a board spill," she says.

From October 2013, British remuneration reports will be split in two. Future pay arrangements will be put to a binding vote of shareholders, with a 50 per cent voting threshold.

"If they don't approve the resolution, the remuneration has to be in accordance with a previously approved policy until the new one is approved," McGuire says.

A second part of the report, relating to how the pay policy has been implemented in the year just passed, is only subject to an advisory vote.

The contents of this part of the report must adhere to new rules designed to make executive pay more transparent.

It must contain a single figure of remuneration for each director, and a chart comparing company performance and chief executive pay.

McGuire says the main aim of the British politician overseeing the reform, the Business Secretary, Vince Cable, was to enhance communication between management and shareholders.

"He didn't really seem to think that the vote would be needed," she says. "His aim was that it would encourage the parties to negotiate and by the time they got to the AGM the policy would be accepted."

Not all the recent announcements of abstinence are aimed only at shareholders.

The chief executive of uranium miner Paladin Energy, John Borshoff, said this week he would probably accept another 12 months on reduced pay after taking a 25 per cent pay cut in November.

While acknowledging the cut last year was a response to investor concerns, Borshoff also said it was good for staff morale.

Nor are all the pay cuts linked to poor performance.

When Wesfarmers reported an 11 per cent increase in its annual profit yesterday, there were plaudits all round for the head of its Coles supermarket subsidiary, Ian McLeod.

In June Wesfarmers shareholders learnt that the chairman, Bob Every, had persuaded McLeod to sign a new contract to take effect from July 2013 at much less than half his present pay. In the year to June 2011, McLeod's total pay was $15.6 million, including $11 million in short-term share awards. The previous year his total pay was $8 million, including $4.4 million in short-term share awards.

From next year his total pay could be in the region of $5 to $6 million.

Paatsch from Ownership Matters says this example does not shed much light on the wider debate.

"Ian McLeod is one out of the box in the sense that his initial package was so incredibly generous that this is simply a return from the stratosphere to high altitude," he says.

"The only way from there was down."

MARIUS KLOPPERS BHP Billiton Said on August 3 it was clearly disappointing that BHP Billiton had to write down the value of shale gas assets by $US3 billion and he would forgo his cash bonus.

PAUL OMALLEY Bluescope Steel Said on Monday he would forgo any salary increase, bonus or long-term incentives for the year to June. Asset write-downs of $310 million are expected to contribute to a net loss after tax of $1 billion.

TOM ALBANESE Rio Tinto Said in February he would not ask for a bonus this year after Rio Tinto wrote $US9 billion off the value of aluminium assets which had been purchased on my watch.

MIKE SMITH ANZ Froze the salaries of 900 ANZ Bank executives in October and said yesterday for many executives at ANZ including myself, salaries will remain fixed for 2013 just as they were this year.

KERR NEILSON Platinum Asset Management Said on Thursday that the team he leads at Platinum Asset Management are aware that we have done a poor job over the last two years in managing some of our funds. He and some executives will receive no increase in base salary, no bonus and no options.

CHRIS DELANEY Goodman Fielder Said on Tuesday that a 20 per cent fall in Goodman Fielders earnings was disappointing in a challenging year, his first as chief executive.

He will receive no bonus, as he did not meet the targets set by the board last year IAN NAREV Commonwealth Bank Marked his first year at the helm of the Commonwealth Bank with a record profit and a wage freeze. A spokeswoman said in July: Our chief executive officer, executive committee and other senior employees will receive no increase in base salaries for the 2013 financial year.

PETER SCOTT Perpetual Uttered rare words for a chairman in June when he said my own remuneration will be reduced by 42 per cent as part of cost cuts at Perpetual including shedding 300 jobs. Average pay for non-executive directors will fall 25 per cent.

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