BHP Billiton announced on Friday that its long-term executive pay plan had disgorged a total 1,225,438 shares for current chief executive Andrew Mackenzie, former CEO Marius Kloppers and five other past and present members of BHP's executive inner circle.
The shares were valued at $43.6 million on Friday, and they are the end-product of a five-year benchmarking process that measured the value BHP created between the fourth quarter of 2008 and the fourth quarter of this year. BHP's Australian share price averaged $44.04 in the fourth quarter of 2008. It averaged $33.06 in the fourth quarter this year, $10.98 or 24.9 per cent lower.
So why did the shares vest? In colloquial terms, BHP's answer is that if you think it was roughed up in the global sharemarket rout that occurred in 2008 and 2009, you should see the other guys.
It's all about relativities. The long-term incentives are triggered if BHP's total shareholder return (TSR) - that's share price movements combined with dividends - meets or beats a peer group of companies by a certain percentage.
The peer group includes obvious mining competitors including Rio Tinto, Vale of Brazil, Xstrata and Anglo American and three independent oil and gas groups: Apache, BG Group and Devon Energy, and BHP outran it over the five-year period: beat it by enough, in fact, for every share created in 2008 to vest this year.
The problem - one BHP's remuneration committee has attempted to address by unilaterally cutting the size of the disgorgement - is that the Australian group's outperformance was in absolute terms actually less serious underperformance.
BHP was only measuring itself against mining and oil gas companies in 2008. It expanded the sample in 2010 by loading in the MSCI World share index that tracks 1500 listed global companies, but the mission for its top executives remained the same.
They must match the total five-year return of the peer group to get long-term incentive shares flowing. The number of shares that do flow depends on how much BHP beats its peer group by, but if it outperforms by an average of 5.5 per cent a year or 30.7 per cent over the five-year period, all shares will vest.
The share price is the dominant driver of the TSR, and as the share price comparison above suggests, BHP's TSR between the March quarter 2008 and the March quarter this year was negative, at minus 9.4 per cent. The TSR of the peer group was, however, much worse, at negative 44 per cent. BHP outperformed by 34.6 per cent, beating the 30.7 per cent upper boundary of the long-term share scheme, and triggering 100 per cent vesting.
The board's remuneration committee is chaired by John Buchanan, a former BP senior executive, and includes former Goldman Sachs partner and managing director Carlos Cordeiro, Pat Davies, a former chief executive of South Africa's Sasol petroleum and petrochemical group and senior Australian company director John Schubert.
BHP consults with major shareholders about remuneration and other sensitive issues ahead of its annual meetings in October, and the long-term scheme became a focus this year as it became clear that the group would register a negative five-year TSR for the first time since the scheme's inception in 2004, while also comprehensively outperforming the peer group. Institutional shareholders were sounded out about the activation of the committee's reserve power to alter the vesting terms, and interaction between the remuneration committee and the full board intensified.
The decision, backed by most of the big shareholders that BHP consulted, is to cull the disgorgement by 35 per cent, to 65 per cent of the potential total. Andrew Mackenzie is included in the cull, and an offer from him to give up another 50,000 shares was accepted by the board: his 2008 "dividend" fell in total by 207,838 shares or 46 per cent.
BHP said the committee decided to cull entitlements as it felt that "more closely aligning the experience of shareholders and executives was important", but Mackenzie, for example, still gets 243,126 shares worth about $8.6 million, and that raises an obvious question: should BHP's top executives get bonus shares when the group's shareholders go backwards?
There are two possible answers. The simple one, is that companies aim to retain talent. The withdrawal of bonuses that have been earned risks losing it.
The longer one is that if BHP doesn't go backwards as badly as its peers, it goes forward. It creates value, relatively speaking.
It is "value" that is not actually in the bank, however, and a large industry has emerged in the investment world in the past two decades based on "absolute return" methodology, where investment managers only receive bonuses if they deliver positive returns.
The idea hasn't spread far into corporate remuneration schemes, however, and the argument against is that absolute returns introduce factors that management cannot influence. Managers good and bad were whacked by the global crisis, for example, and those who coped best arguably should be rewarded.
There's no doubt that relative to the other majors in its markets, BHP is stronger now than it was when the crisis began. By clipping the long-term bonus without killing it, the board is recognising that fact.