Virgin Blue's new boss in the pink

VIRGIN BLUE'S new chief executive, John Borghetti, will be able to earn as much as $4.5 million in his first year in the job, $1.8 million more than his predecessor, Brett Godfrey, could earn.

By InvestSMART · 8 May 2010

By InvestSMART ·
8 May 2010

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VIRGIN BLUE'S new chief executive, John Borghetti, will be able to earn as much as $4.5 million in his first year in the job, $1.8 million more than his predecessor, Brett Godfrey, could earn.

Under the terms of his contract released yesterday, Mr Borghetti will earn a base salary of $1 million, while also pocketing a cash bonus of $1 million if he meets unspecified short-term performance measures.

In addition, the former senior Qantas executive will be eligible for up to $2.5 million in the first year if he meets long-term incentive targets.

His long-term bonus will average $1.5 million annually over the next three years if he meets the targets, $600,000 a year more than Mr Godfrey could earn.

Mr Godfrey could earn a total package of as much as $2.7 million a year if he met his short- and long-term targets.

Last financial year Virgin Blue's co-founder earned a total of $1.89 million, including $281,000 in short-term bonuses, amid one of the worst aviation downturns.

Mr Borghetti, who officially starts at Virgin Blue today, earned a total of $4.93 million in his last year at Qantas, which included $1.6 million in termination benefits.

Under his new contract, Mr Borghetti will buy $200,000 worth of shares in the airline and, in return, will receive $400,000 worth of performance rights that will vest if Virgin Blue's share price is 25 per cent higher at the end of 2013 than at the close of trading yesterday.

Shares in Virgin Blue closed down 3? yesterday, at a six-month low of 49?. The airline issued a profit downgrade on Tuesday, warning that its pre-tax profits this financial year will be at the lower end of its guidance range of between $80 million and $110 million due to weakness in forward bookings.

Virgin Blue's chairman, Neil Chatfield, said in a statement that Mr Borghetti's incentives were "strongly weighted towards alignment with shareholders' interests".

Qantas's chief executive, Alan Joyce, earned a total of $3.66 million for the year to last June. However, he was in the top job for just over half that period, having succeeded Geoff Dixon in November 2008.

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Frequently Asked Questions about this Article…

How much can John Borghetti earn as Virgin Blue's new CEO in his first year?

Under the contract released with his appointment, John Borghetti can earn up to $4.5 million in his first year: a $1 million base salary, a $1 million short‑term cash bonus for meeting short‑term measures, and up to $2.5 million in long‑term incentives if long‑term targets are met.

What share‑based incentives does Borghetti have to align his interests with Virgin Blue shareholders?

Borghetti is required to buy $200,000 worth of Virgin Blue shares and will receive $400,000 worth of performance rights that will vest only if Virgin Blue's share price is at least 25% higher at the end of 2013 than it was at the close of trading on the announcement day—an arrangement the chairman said strongly aligns incentives with shareholders.

How do Borghetti's long‑term incentives compare with his predecessor Brett Godfrey's package?

Borghetti's long‑term bonus is expected to average $1.5 million a year over the next three years if targets are met, which is about $600,000 a year more than Brett Godfrey could earn. Overall, Borghetti's maximum first‑year package of $4.5 million is about $1.8 million higher than the maximum package previously available to Godfrey.

What did Virgin Blue tell investors about profit expectations and how did the market react?

Virgin Blue issued a profit downgrade, warning pre‑tax profits for the financial year would be at the lower end of guidance of $80 million to $110 million due to weakness in forward bookings. The airline's shares fell and were trading at a six‑month low following the announcement.

How does Borghetti's recent pay at Qantas compare to his new package at Virgin Blue?

Borghetti earned a total of $4.93 million in his last year at Qantas, a figure that included $1.6 million in termination benefits. His potential first‑year earnings at Virgin Blue (up to $4.5 million) are therefore similar in scale to his Qantas remuneration that year.

What were Brett Godfrey's and Qantas CEO Alan Joyce's reported earnings cited in the article?

The article notes Brett Godfrey could earn up to $2.7 million a year if he met short‑ and long‑term targets; last financial year he earned $1.89 million including $281,000 in short‑term bonuses. Qantas CEO Alan Joyce earned $3.66 million for the year to last June.

When did John Borghetti officially start at Virgin Blue and what immediate commitments did he make?

According to the article, Borghetti officially started at Virgin Blue on the day the contract was released. Under his new contract he is committed to buying $200,000 worth of shares and is entitled to $400,000 of performance rights tied to share‑price performance through the end of 2013.

What should everyday investors watch for after this CEO appointment and the profit downgrade?

Everyday investors may want to monitor three things highlighted in the article: (1) how Virgin Blue's forward bookings and profit guidance evolve after the downgrade, (2) the company's share‑price performance relative to the 25% vesting hurdle for the CEO's performance rights, and (3) whether management incentives remain aligned with shareholder outcomes as the new CEO implements strategy.