Two recent shareholder-initiated strikes, one at Telstra and the other at Tabcorp, potentially reflect different foundations leading shareholders to vote against their Remuneration Reports.
Without having insight into the foundation for Board decisions, it is evident to me as a participant in this process over a considerable period of time that both of these Boards:
- have the benefit of experienced Directors;
- have exercised judgement having regard to the circumstances which their organisations faced over the prior twelve months;
- have formed a view and rewarded their principal executives, particularly their Chief Executive, for accomplishing outcomes that reflected transformational or integration challenges and that these demands did not contribute in the current Financial Year to a universally positive outcome for shareholders.
In the case of Telstra, their Chairman, John Mullen, an experienced Director and internationally experienced executive, observed that shareholders may have formed the view that given the attributes of Telstra and the scale of Australia’s leading companies, remuneration levels are high.
Also implicit in John Mullen’s comments were that the Board, in determining executive reward, needed to be mindful of competitive influences in exercising their judgement in relation to either fixed remuneration or incentives. The Telstra Board acknowledged that the CEO’s long-term incentive award, which was due to vest in the current year, will not vest and not deliver a benefit to the leadership team.
Shareholders, who may have acquired shares two or three years ago at about $5, are clearly venting on the fact that their shares are currently trading in the low $3 value and that dividends are likely to decline.
The Telstra Board indicated that they did not appoint an independent remuneration adviser who provided recommendations either in respect of the 2017 Financial Year or the 2018 Financial Year.
Proxy Advisors drawing upon recently published Annual Reports among organisations 50% smaller and 50% larger than Telstra, where there are not an overwhelming number of organisations though covering all attributes and using market capitalisation as an indicator, would have observed that the CEO’s fixed remuneration ($2.39 million) is approaching the 75th percentile ($2.41 million). Of the comparators, every CEO bar one received an annual incentive which averaged $2.25 million (Telstra: $1.366 million). Total annual remuneration, including fixed remuneration and an annual incentive on average stood at $3.88 million, at the 75th percentile $4.44 million (Telstra: $3.74 million).
Total statutory reward, on average, exceeded $9 million among the eight relevant companies and around $8 million at the median, revealing that the outcome performance aligned at Telstra was not reflective of peers ($4.52 million).
Notwithstanding the actual outcome for Telstra’s CEO, his nominal total reward opportunity stands at $11.95 million of which $9.56 million is at risk. This fact is likely to have been the focus of the Chairman’s comments.
Using the comparative data, the average fee payable to a Non-Executive Chairman stood at around $700,000 and at the 75th percentile around $780,000 compared to the Chairman’s fee at Telstra of $775,000. The reward arrangements, having regard to both annual revenues and market capitalisation for Chairs, were comparable.
John Mullen referenced the influence of the international marketplace, though the Board did not specifically comment on the sourcing of their leadership team, having influence to pay levels for individuals with comparable experience, capability and leadership qualities to those that are potentially available to be sourced from a global marketplace.
The Telstra Chairman made one particularly apposite comment, which I am able to reflect upon based on my experience. If I can interpret the Chairman’s observation, it was essentially that a major company places itself at serious risk if it embarks alone upon the transformation of remuneration arrangements. I have had similar conversations over an extended period of time where Chairmen and Chairs of Remuneration Committees have indicated to me that while they may be supportive of a more modest approach to reward and a more demanding approach to performance hurdles, it is impossible to pursue such a process alone and that they require another 20 like-minded Boards to adopt a similar approach to be supported by well-informed, independent advisers who would contribute to that change on a broad platform.
This will remain a key challenge for Boards unless members of organisations, perhaps following the influence of the Business Council, collectively agree to take a stand to ensure that the approach to long term incentives and annual incentives is rigorous and transparent, and discretion is applied on a very limited basis.
In an entirely different setting, the Chairman of Tabcorp, Paula Dwyer, faced shareholders who had a negative view of the remuneration arrangements of the company and the judgements exercised by the Board.
On the basis of our observations, this may have in part been influenced by the challenges faced by the company in their loss-making joint venture in the UK. The payment of a not insignificant incentive to their CEO appears to be associated with the successful acquisition of the Tatts Group, and the progressive integration of that group into the now expanded Tabcorp whose market capitalisation a year earlier stood at around $3.6 billion, with an ASX rank in the mid-80s, and today has a market capitalisation marginally shy of $10 billion ranking in the low 40s of the ASX.
While over the last two years Tabcorp indicated that it has not received a recommendation from a remuneration consultant, they revealed that their CEO, in managing both enterprises, would be paid marginally less than the Chief Executive of Tatts Group before the merger. Notwithstanding, the increase in their long-serving CEO’s fixed remuneration was 60%, or $750,000. The extent to which that was benchmarked was not disclosed. The total reward opportunity of their CEO increased from $5 million under the prior arrangements to $8 million under the changed arrangements, or a 60% overall adjustment.
Proxy Advisors in reviewing reward at Tabcorp among organisations with a market capitalisation 50% smaller and 50% larger, would have observed the average level of fixed remuneration was $1.75 million, at the median $1.64 million and at the 75th percentile $2.2 million (Tabcorp: $1.64 million, $2 million from December 2017).
The average bonus received by all bar six of incumbents was $1.2 million, at the median $1.2 million and at the 75th percentile $1.68 million (Tabcorp: $660,527). Total annual remuneration arrived at through fixed remuneration and annual incentives, stood at approximately $2.8 million on average and at the median, and $3.5 million at the 75th percentile (Tabcorp: $2.3 million).
Total statutory reward stood at $4.1 million on average, $4.35 million at the median and $5.3 million at the 75th percentile (Tabcorp: $4.1 million). While acknowledging the actual outcome for the 2018 Financial Year Tabcorp CEO’s nominal total reward opportunity for the 2019 Financial Year stands at $8 million of which $6 million is at risk.
We note at Tabcorp Board fees, which were not the subject of a recommendation from an independent remuneration consultant, at the level of Chairman increased from $430,000 to $590,000 or an increase of around 37%. The prior fee for the Chairman of both organisations was similar. The combined entities total Board costs had been reduced though individual Directors’ fees increased.
For organisations among Tabcorp’s comparators, in terms of market capitalisation, the average fee payable to a Chair was $466,000, at the median $480,000 and at the 75th percentile $533,000. Having regard to organisations with comparable revenues, the average fee was approximately $430,000, at the median $441,000 and at the 75th percentile $509,000.
Another organisation where shareholders appeared to endorse high remuneration was that of CSL where the CEO, long-serving in the position, is US-based. CSL’s market capitalisation is approximately 2.5 times that of Telstra and around 9 times that of Tabcorp. The CEO’s fixed remuneration was in the order of $2.6 million, his annual bonus $4.3 million and his total statutory reward approximately $16 million (2017: $11.7 million).
The company’s market capitalisation at the end of the prior Financial Year stood at around $57 billion with the share price around $124. At the time of the 2018 Annual General Meeting, the company’s share price was over $200 and its market cap over $90 billion. Clearly with a $30 billion uplift in shareholder wealth $16 million is acceptable.
In this context it may well not be the quantum that causes concern but rather the performance. The Chairman’s fee at CSL stands at $700,000.
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