Companies failing to factor in costs when calculating bonuses
The Australian Council of Superannuation Investors, whose members manage $350 billion in assets, said its revised governance guidelines for the 2013 reporting season took into account new expectations regarding board practices and executive pay.
It comes as companies release their annual reports for the 2013 financial year, detailing the incentives paid on corporate salaries. Council chief executive Ann Byrne said the trend of calculating bonuses on "adjusted" figures, rather than those required under disclosure rules, was worrying.
"The use of normalised and adjusted earnings in bonus plans will be in the spotlight this reporting season," Ms Byrne said. "Of particular concern are companies that exclude costs and impairments from bonus calculations.
"An impairment charge should not be excluded from the bonus calculations for the CEO and executive team which acquired the asset that has been impaired."
Ms Byrne would not name companies, but said of particular focus were bonuses paid for acquisitions rather than shareholder value ("empire building"), and fixed-pay increases for executives after a pay freeze ("catch-up" bonuses).
Several big pay rises have been revealed already during reporting this month. A 34 per cent rise for Aurizon chief executive Lance Hockridge took his total package last financial year to $6.1 million.
The chief executive of troubled steelmaker BlueScope, Paul O'Malley, also had his total salary package increased to $5.1 million in the year to June 30, up from $2.8 million a year earlier, after the steelmaker's board agreed to a 3 per cent rise in his base pay after a three-year freeze.
Ms Byrne said the re-election of a director to a board was also a focus of the new guidelines.
"ACSI will be particularly scrutinising boards where there have been ongoing strategic issues. The right to elect directors remains one of the important entitlements of Australian shareholders."
The Australian Shareholders' Association has also changed its preferred measurements for bonus pay. In a paper this month it said incentives should be calculated on relative total shareholder return, rather than earnings per share, as the latter had been manipulated by accounting treatments.
Frequently Asked Questions about this Article…
The Australian Council of Superannuation Investors (ACSI) says some big listed companies are using ‘adjusted’ or ‘normalised’ earnings instead of the figures required under disclosure rules. That can mean costs such as asset write‑downs or impairments are left out of bonus calculations, potentially overstating performance and inflating executive pay.
An impairment charge is an accounting recognition that an asset has lost value. ACSI chief executive Ann Byrne says an impairment should not be excluded from bonus calculations for the CEO and executive team that acquired the impaired asset — because excluding it can hide responsibility for poor decisions.
The article highlights a 34% rise for Aurizon chief executive Lance Hockridge, taking his total package to $6.1 million, and BlueScope chief executive Paul O’Malley, whose total pay increased to $5.1 million from $2.8 million after his board agreed a 3% base pay rise following a three‑year freeze.
ACSI’s revised guidelines put the use of normalised and adjusted earnings in bonus plans under the spotlight and flag greater scrutiny of boards — particularly where strategic issues persist. The guidelines are intended to ensure bonus calculations and board re‑elections are examined more closely by investors.
‘Empire building’ refers to executives being rewarded for acquisitions or growth that boosts the company’s size rather than delivering shareholder value. ACSI identifies bonuses tied to acquisitions rather than returns to shareholders as an area of concern for investors.
‘Catch‑up’ bonuses are fixed‑pay increases granted after a period of pay freezes. The article notes concern about such increases — for example, BlueScope’s CEO received a base pay rise after three years without increases.
The Australian Shareholders’ Association recommends calculating incentives based on relative total shareholder return (TSR) rather than earnings per share (EPS), arguing EPS can be manipulated by accounting treatments while relative TSR better aligns pay with shareholder outcomes.
Investors should check whether bonuses are based on disclosed statutory figures or on adjusted/normalised earnings, whether costs and impairments are excluded from bonus calculations, whether bonuses reward acquisitions over shareholder value, and any notes on director re‑elections or ongoing strategic issues highlighted by the board.
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