THE DISTILLERY: Remuneration rumpus

The big global mining houses are in the process of selecting the next generation of powerful resources chief executive officers almost in unison. In the wake of the GFC, the next batch of mining superstars faces a different mix of challenges to their predecessors, which are explored this morning by The Australian's Barry Fitzgerald.

One of the issues will be executive remuneration, as shareholders become increasingly bemused by the complexity of incentive schemes that, on face value, appear inept at delivering value for shareholders. The Australian Financial Review is having a go at the topic this morning – perfect timing.

But first, The Australian's Barry Fitzgerald calls the changing of the guard at the top of the world's biggest mining companies set to take place next year as "unprecedented”.

"Not the least of the challenges will be dealing with the rise of resources nationalism around the globe. Host countries are making demands for a greater share of their mineral wealth, as well as imposing more stringent controls on issues ranging from bribery and corruption, through to the myriad issues captured by the corporate social responsibility mantra. On the domestic front, the newcomers will be dealing with a new Australian government. The federal election, which must be held before November next year, promises to offer stark differences in the policy platforms of the Labor and coalition parties. Assuming no radical shifts between now and the election, the mining and carbon taxes will either live on, or they won't.”

The Australian Financial Review's Chanticleer columnist Tony Boyd has taken a look at a fresh report on executive remuneration and concluded that boards simply have to start from scratch.

"An analysis of executive incentive programs in Australia published at the weekend by BlackRock shows that boards who play by the rules set by proxy advisers get 95 per cent shareholder support for remuneration reports at annual meetings. Caution among boards has resulted in inappropriate performance measures being used for remuneration payment hurdles, according to BlackRock's head of corporate governance, Pru Bennett. She says relative total shareholder return is not appropriate for many of the companies that utilise it. Bennett urges companies to break out of the straitjackets and not just structure packages to please the proxy advisers. However, despite an apparent cookie-cutter approach to pay in many boardrooms, the oversight of remuneration is absorbing an increasing amount of time. One prominent chairman says his board now spends 30 per cent of its time on remuneration.”

Think about that for a moment. Thirty per cent of a board's time being spent trying to figure out the pay levels for a small handful of employees. Granted, senior executives are important, but any director would be much more interested in examining what the executives are doing rather than what they're paid to do it.

The Australian Financial Review's Michael Smith takes a look at the 'pay cut' for ANZ Banking Group boss Mike Smith.

"While his total salary was down 3.6 per cent to $9.674 million, his actual take-home pay was well in excess of that. Smith pocketed an additional $11.97 million in equity, thanks to shares and options granted in previous years which vested in 2012. This figure includes $1.9 million in equity from short-term incentives granted in 2009 and 2010, $5.37 million in long-term incentives granted in 2007 and $4.7 million in options granted in 2008. This is on top of the $9.674 million, although to be fair, part of that figure is in the form of equity which has not yet vested. No one is complaining, though. These payments had been approved by shareholders as far back as five years ago and are commonly established as an incentive and reward for meeting performance targets set in previous years. However, they highlight the illusory nature of remuneration reports, which are a minefield for the uninitiated trying to work out if a senior executive's take-home pay is higher or lower than last year.”

That's a crucial point in this debate. Some of the outrage at executive pay packages is not so much directed at the size of the pay levels, but at the convoluted logic that leads to the particular number.

The Distillery would also add that if you chat to experts on executive remuneration they will tell you two things. Firstly, standard incentive structures are relatively simple to follow, but they can be terribly inept at reflecting some of the more unique characteristics of a company or industry. Secondly, once you start tampering with the structure to reflect an individual company, you're in a slippery slope into the confusing world of tailored executive remuneration that's currently frustrating shareholders.

Sticking with company issues for a moment, Fairfax's always engaging telecommunications reporter Lucy Battersby explains how the liquidators of collapsed telco One.Tel are still chasing James Packer, Lachlan Murdoch and their associated companies for almost $400 million.

The Australian's John Durie reports that Goodman Fielder boss Chris Delaney is finally getting some recognition from the big supermarkets when it comes to the degree to which he should be covering rising costs.

Meanwhile, Fairfax's Michael West makes the argument that smart metres, far from being simply a device to inform the consumer, are the next prism through which the power industry will game the consumer.

The Australian Financial Review's Matthew Stevens passes on the concerns of the Law Council of Australia in relation to legislative proposals to expand the powers of the president of Fair Work Australia.

The Australian's economics editor, David Uren, makes a good show in his analysis of the decline in productivity in the Australian manufacturing industry.

In international news, The Australian Financial Review's Karen Maley contemplates the possibility of the Japanese getting more aggressive in relation to the yen.

Fairfax's Malcolm Maiden has returned to Australia from a trip to the US, where he toured the BHP Billiton shale fields in Texas and spoke to economists and analysts in New York. "I have returned convinced that the shale boom is a global game-changer, and that the fiscal cliff is a beat-up,” writes Maiden.

Elsewhere, The Australian Financial Review's Washington correspondent Ben Potter passes on the words of former Obama administration budget director Peter Orszag, who believes the Democrats cannot fulfil their election promises without increasing taxes on the middle class. It's either dropping some promises or taxing the middle, he says.