AUSTRALIA'S system of executive pay simply does not work for a large number of companies listed on the ASX, according to a corporate governance expert for one of the world's biggest investment funds.
Pru Bennett, of BlackRock Australia, has called for a rethink of the way long-term incentives are used to remunerate executives, particularly for mining and resources stocks in the early stages of development.
Ms Bennett's doubts about the current system were shared by the OZ Minerals' chairman, Neil Hamilton, who said the amount of time companies were devoting to executive pay had got "out of hand".
Ms Bennett voiced concerns that measurements like "earnings-per-share", "relative total shareholder return" and "return on capital employed" were inappropriate for judging executives in companies that were mere explorers or in the early stages of development.
She said those measurements could be undermined by the timing of spending or external factors like weather and commodity prices, meaning they were not an effective way to judge executive performance and incentive payments.
"These companies are finding it difficult to meet remuneration standards once they get into the index, they just don't meet the major proxy advisers' guidelines because they are just not operational, their only revenue is interest," she said. "What we've got in executive remuneration at the moment just doesn't work."
Ms Bennett said options would be a better way to reward executives in such companies, so long as controls were in place to prevent shareholder dilution.
"They can attract and retain good people with options without impacting significantly on the cash flow which is vital to their long-term development," she said.
BlackRock is the world's biggest investor in resources companies, holding stakes in countless companies including the biggest stake in BHP Billiton.
Concerns about executive pay were also raised at OZ Minerals' annual meeting in Melbourne yesterday, where Mr Hamilton expressed frustration that remuneration issues were now dominating discussions with investors and proxy advisors.
"I will probably spend five or six days talking to people about remuneration, and far less talking about the balance sheet and the company strategy, which I think tells you it has got out of hand," he said.
"We have been around the world on this issue a few times and I can assure you it takes an inordinate amount of the board's time."
Despite those comments shareholder advocates at yesterday's meeting urged OZ to extend the term of their incentives from three to five years.
Frequently Asked Questions about this Article…
Why do experts say Australia's executive pay system 'does not work' for many ASX companies?
Corporate governance experts, including Pru Bennett of BlackRock Australia, say the current executive pay system often fails for many ASX-listed companies—especially mining and resources firms in early development—because common long-term incentive metrics aren’t suitable for non-operational explorers and can be distorted by timing, weather or commodity prices.
Why are common performance measures like EPS, TSR and ROCE inappropriate for mining explorers?
Pru Bennett argues that metrics such as earnings-per-share (EPS), relative total shareholder return (TSR) and return on capital employed (ROCE) can be misleading for explorers because their results are heavily affected by the timing of spending, external factors like weather and commodity prices, and because many early-stage companies aren’t yet operational.
What alternative long-term incentives are being suggested for resource-sector executives?
The article notes BlackRock’s view that options could be a better way to reward executives in early-stage mining and resources companies, provided there are strong controls to prevent shareholder dilution and protect existing investors.
How can share options help resource companies attract and retain executives without hurting cash flow?
Options don’t require cash payouts up front, so they allow companies to offer competitive rewards while preserving limited cash for development. The article stresses the need for anti-dilution controls so option plans don’t unfairly dilute existing shareholders.
What concerns did OZ Minerals’ chairman raise about executive remuneration?
OZ Minerals chairman Neil Hamilton said remuneration conversations have ‘got out of hand,’ taking up an inordinate amount of board time and dominating discussions with investors and proxy advisers, sometimes at the expense of talks about balance sheet and company strategy.
How are proxy advisers and shareholder guidelines affecting executive pay debates?
The article explains companies can struggle to meet major proxy advisers’ guidelines—particularly early-stage resource firms that aren’t yet operational—which drives extended discussions between boards, investors and proxy advisers about appropriate pay structures.
What role does BlackRock play in the discussion about executive pay in resources companies?
BlackRock, represented by Pru Bennett in the article, is active in the debate as a major investor in resources companies; the firm is described as the world’s biggest investor in resources and holds significant stakes including in BHP, giving its views weight with companies and markets.
Are investors suggesting changes to the length of executive incentive periods?
Yes—shareholder advocates at OZ Minerals’ annual meeting urged the company to extend incentive terms from three to five years, reflecting calls for longer-term alignment between pay and company development in the resources sector.
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