When CEO Comparisons Mislead

Last month a number of publications ran articles on Macquarie Group CEO Nicholas Moore’s pay package, noting that he was now the second highest paid CEO of a listed Australian company, with his pay package only trumped by that of Nine CEO David Gyngell.


The comparison is based on the most recent remuneration data for both companies, which is the 2015 annual report to 31 March 2015 for Macquarie Group and the 2014 annual report to 30 June 2014 for Nine Entertainment.

The article would make for interesting reading except that the comparison has very little meaning.

As most of our clients would be aware, the issue is the way long term incentives are presented in annual reports.

For accounting purposes, companies must report the cost of rewarding their executives and this must be expensed against the profit and loss statement. For remuneration that is paid in cash, this is simple enough. It gets trickier where pay is contingent on performance criteria or service.

Here, the company must amortise the expense of the deferred payment over a period of time, discounted for the possibility that the company will never have to make the payment – for example if the performance criteria are not met, or the employee leaves the company and forfeits the payment. It is this value that is disclosed in the statutory remuneration table.

If the line run had been that Macquarie Group has expensed the second highest cost of CEO reward of other listed companies it would have been more correct – but made less of a story.

Although the accounting value recorded in the statutory table is a good estimate of the cost to the company of remuneration, it says very little about how much an executive is actually paid.

There are a number of reasons for this:

  1. Large one off payments, for example retention and sign-on payments, or in David Gyngell’s case a one-off payment linked to his performance prior to the IPO of the Nine Entertainment Company, inflate the figure expensed. This is despite the fact that such awards are not indicative of remuneration paid by listed companies in the normal course of their business.

    In the case of IPOs, executives have often been working with a company for many years while it was in private ownership and have holdings under an incentive scheme or prior entitlements relating to services rendered. When listing occurs, such holdings can be dealt with in a variety of ways, but often result in the issuing of equity in the newly listed company to account for work over prior years. This equity must be expensed over the time of vesting or restriction – but does not reflect remuneration going forward, rather efforts over prior periods. In addition to his other awards, Gyngell received an award of $10m worth of shares relating to longstanding prior contractual agreements with Nine, of which he had been the CEO for a number of years prior to listing. Interpretation is further complicated by escrow provisions attached to the award, which was restricted for disposal until three years after completion of the IPO.

    Other examples from 2014 where distortions were created due to one-off grants of equity during the IPO process include:

    • Veda Group’s Nerida Caesar – Caesar was listed as number 15 in the Australian Financial Review’s 2014 executive pay survey due partly to a high disclosed long term incentive value reflecting a retention grant of 25,000,000 options that vested at IPO but could not be disposed of or dealt with unless Board approval was obtained.
    • Recall Group’s Doug Pertz – Pertz was listed as number 41 on the Australian Financial Review’s 2014 list due partly to a high disclosed long term incentive value that reflects rights granted around listing worth $6 million to compensate him for foregone Amcor incentives. These rights were restricted for four years.

    The significant number of new listings over the recent year could cause further distortion in comparative analysis driven by cash or shares paid to acknowledge an extended period of performance or to fulfil prior contractual commitments. Some executives may receive equity holdings to a value of $20 million that become available over the calendar years following IPO.

    Maverick Drilling and Exploration’s Michael Yaeger was a non-IPO example. He was number six on the AFR list due to a grant of shares and rights made in return for his accepting employment terms when he started at the company on 15 October 2013. Without this sign-on grant, his total remuneration would have been between $1 million and $2 million rather than over $11 million.

  2. The figure displayed aggregates the expense booked for multiple incentives granted over a number of years – Therefore, it is not what the executive “received” in the financial year, what the executive was granted in the financial year or what the executive would benefit from in the financial year.
  3. In some cases where the equity instrument used for short term incentive deferral is the same as that used for the long term incentive, the figure displayed mixes the expense booked for short and long-term incentives.
  4. Even if the grants were disclosed individually, the amount expensed may not bear any resemblance to an executive’s take home pay packet. For example:
    • If none of the long term incentive vests, the amount expensed will overstate the final value of the grant to the executive, because the amount the executive receives at the end of the performance or service period is zero.
    • If all of the long term incentive vests, the amount expensed will either under or overstate the final value of the grant to the executive depending on the market value of the shares at grant.
  5. Changed conditions and assumptions, the failure to meet performance conditions or executive movements can lead to negative values being expensed, which intuitively have little meaning in a remuneration sense.

Therefore, if an article looks at Gyngell and Moore and says the former received more than the latter in a given year based on their total remuneration, where total remuneration includes an accounting value of the long term incentive, the statement means is based on their statutory expensed values and not their actual annual remuneration.

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